Participant Bankruptcy

[k man]

What action should a plan take if a participant who has an outstanding files for bankruptcy? The Plan received a proof of claim from the bankruptcy court. Should we declare the loan in default and give the participant a 1099?

[Guest hank]

k man...

It may depend on several factors. Does your plan loan policy or plan document address the issue in its language? If not, then the administrator probably has some discretion about when the loan is declared to be in default. (By the way, is the loan repaid through payroll deduction?)

If your document addresses the issue, it may require default on receipt of notice of the participant's bankruptcy filing. However, FILING for bankruptcy only means (until a plan is filed and confirmed by the Bankruptcy Court)that there is an automatic stay on collection of debts, etc. If you are doing auto deduct from payroll for your loan repayment, you may still be able to continue to get your loan repaid pending the bankruptcy, in which case you can't declare the loan in default.

Bottom line: I'd look carefully at your plan language, and the circumstances of loan repayment. If the participant can continue to make payments (thru payroll deduct), I'd be careful about declaring the loan in default until the bankruptcy petition is decided or dismissed.