Court Order to stop participant loan repayment

[Guest nlmc18]

A client received a notice from the US Bankruptcy Court informing them to stop the loan repayment deduction for a participant in their 401(k) plan. The Notice cited the 6th Circuit Court's 1995 decision in Harshbarger. Is there any more current information that I can look at regarding this situation?

[Harwood]

Buchferer, Gerald In re, (1997, Bktcy Ct NY) 216 BR 332 .

Esquivel, Baldo Fabela In re, (1999, Bktcy Ct MI) 239 BR 146.

[mbozek]

Since bankruptcy law is not preempted by ERISA, bkcy ct orders to cease loan repayments are applicable to pension and PS plans. It allows the plan to stop payroll withholding without violating the rule that a plan loan must be a legally enforceable obligation to repay the amount borrowed. Of course, ceasing repayments will result in a default under IRC 72p which will require payment of taxes on the outstanding loan balance. Be interested if the cases cited have any different conclusion.

[Harwood]

All three cases deal with whether plan loan repayments will stop in order to provide more disposable income or if the loan will be paid off before the unsecured creditors.

None of the cases questioned the right of a bankruptcy court to stop loan repayments, if the court felt it was appropriate.

The Buchferer case stands out because it is one of the few cases to consider a plan loan to be a secured debt.