Hardship distributions-- what are "other events provided for in r

[Guest Milt Colegrove]

Please help. I am heavily in debt, 70K school loans, 19K credit card and 18K in 401K loan. This doesn't count home mortgage. If I could get a hardship withdrawal which would take care of the 401k loan and the credit card, I could get by. If not, I may need to file bankruptcy. My plan administrator is rejecting my request due to the fact that my problem does not fit neatly into 4 of the reasons listed in the plan, medical, purchase of home, foreclosure of home and upcoming tuition. There is a #5 and it refers to "other events provided for in rulings, notice or other documents published by the IRS" Can you refer to any of these? Please help, I don't want to file bankruptcy when I have the money if they would just give me access to it. Thank you.

[Wessex]

I'm sorry to say that I don't believe there are any such hardship "other events" except for funeral costs for a family member, which are mentioned in the regulations. I would be telling you the same as your plan administrator.

I am assuming that you have checked and there are no other in-service withdrawals permitted under the plan.

Although I have no expertise in bankruptcy law, bankruptcy initially doesn't seem like the best solution. (Obviously only you and competent counsel can make that determination.) As you probably know, generally school loans are not dischargeable debts. Similarly, although you would not have to continue to make payments on the 401(k) loan, your 401(k) account is not part of the bankruptcy estate and the outstanding balance of the loan would still be offset from your 401(k) account when there was an event that permitted distribution under the plan (such as termination of employment or, in some plans, attaining age 59 1/2). In addition, and more immediately, once repayments are stopped and the loan is in default the outstanding loan balance will be a "deemed" distribution resulting in ordinary income tax liability and because it appears that no exception would apply there would also be an additional 10% federal income tax penalty.

Other thoughts: credit counseling, there are free services; renegotiation or temporary suspension of the school loan repayments; renegotiation of the credit card debt, which likely would be dischargeable in a bankruptcy proceeding; job change so you'd have a distributable event.

Maybe someone else knows of another hardship event. Good luck.

[LCARUSI]

Stop paying your mortgage and use those funds to pay off the debts you want to discharge. When you get the delinquency notice on the mortage, request a hardship withdrawal.

[Wessex]

Becoming eligible for a hardship withdrawal to prevent foreclosure could take some time -- whatever period the mortgagee permits before it actually threatens foreclosure, rather than simply sending an overdue notice -- and the amount for which you could become eligible would be limited to the amount in arrears (and probably taxes). Unless the mortgage payment is very large, the sum of the unpaid mortgage payments may not be sufficient to pay off the credit card debt or the 401(k) loan. (The credit card debt could obviously be reduced; many 401(k) plans do not permit partial repayment of loans.) The hardship withdrawal itself would be needed to pay the mortgage payments, so could not reduce the other debt. Multiple cessation of mortgage payments and hardship withdrawals would likely be needed.

Seeking advice from a credit counsellor who could help you negotiate with your non-401(k) plan creditors may be in your best interests, regardless of whether or not you eventually attempt to get a hardship withdrawal to prevent foreclosure.

[MWeddell]

If you're going to stop paying your mortgage, talk to the lender. They'll be more cooperative and work with you to quickly send a foreclosure notice but be understanding of your payment delay if you talk with them.

Other ideas:

- Check the promissory note you signed to see if you have the option to revoke payroll withholding on the 401(k) loan. You probably don't, but it's worth checking.

- Ask the plan administrator for the opportunity to review the formal plan document. It's not uncommon for the person administering the plan to think that hardship withdrawals are limited to just the 4 safe harbor events when in fact the document states the general hardship standards and merely says that the 4 safe harbor events are deemed to be hardship events but aren't necessarily the only ones.