New Bankruptcy Act

[Randy Watson]

The new bankruptcy law appears to exempt participant loans from the bankruptcy process. I read the changes to state that the filing of a bankruptcy petition should not stop an employer from withholding loan payments from an employee's compensation (exempt from automatic stay). I also read it to state that a bankruptcy plan cannot alter the terms of a loan from a 401(a) plan and that compensation used to pay such a loan cannot be considered disposable income. Ultimately, it appears as though an employer should not have to do anything (with respect to a participant loan) when an employee files for bankruptcy.

An attorney recently drafted a new bankruptcy provision for a participant loan policy that says that the employer should cease withholding loan payments from an employee's compensation: (1) at the request of a participant in bankruptcy; or (2) on request by court order. Although I would not advise an employer to violate a court order, neither situation appears to warrant a stay under the new Act. Anyone care to comment?

[mbozek]

The bankruptcy provision for loans will have to be revised for bankruptcies filed after Oct 16th to conform to the Bankruptcy Reform act provisions you noted.

[Guest rmeigs]

Although I would not advise an employer to violate a court order, neither situation appears to warrant a stay under the new Act.

I agree with you. Here is what one law firm recently wrote: “The new rules provide a better outcome by exempting plan loans from the bankruptcy process. Payroll deduction authorizations remain in effect during the bankruptcy process, meaning that in most cases defaults will be avoided. Also, plan loans survive bankruptcy intact (and in Chapter 13 proceedings, loan terms may not be materially changed), preserving retirement savings and standard operating procedure.”

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