Return of loan payments after filing Ch 13 BK

[Guest Do]

Participant has a 401k loan. He filed for Ch 13 bankruptcy in June. We recieved notice of his filing in August. We stopped payroll deductions for the first paycheck after we received notice. Participant wants a return of payments from June to August. Should we do that? Can we do that?

[Guest Bud]

In addition to stopping future payments, I think you should return loan payments from the date the participant filed for bankruptcy. Once he filed, there was an automatic stay on collections. The plan was not entitled to the payments.

[mbozek]

You have to read the notice to determine when the stay is effective. Usually the creditor ceases collection of the debt upon reciept of the notice. I dont know how the plan could make a distribution to the participant under these circumstances. Also I always have the plan admin advise the participant that stopping the loan payment will result in a default and income taxation on the outstanding balance of the loan. You should give him an opportunity to continue to pay off the loan to avoid default.