New Loan after Defaulted Loan

[Dougsbpc]

Is it possible for a participant to take a new loan 8 months after he defaulted on a previous loan?

Suppose he had a vested balance of $80,000, took a $10,000 loan and promptly defaulted. The $10,000 loan is deemed and he receives a 1099-R. But suppose he then repays the loan. My understanding is the repaid loan becomes basis and then he can take a new loan.

I think the requirement is that the loan on the books must be repaid before the participant qualifies for a new loan?

Agree? Disagree?

Thanks.

[Bird]

It depends on the loan policy. If the plan only permits one loan, then yes, it definitely must be repaid before another loan is issued. If the plan permits two loans, I'd have a hard time refusing on the second. Our (Fort William) loan policy says:

All loan applications will be reviewed on a uniform and nondiscriminatory basis and your loan will be approved if the Plan Administrator determines you have the ability to repay the loan, the loan is adequately secured and the loan meets the other requirements set out below.

The ability to repay part might be a hook if you're looking for one but I've never seen a loan denied for that.

[Tom Poje]

of course any new loans could be denied as 'bad credit risk' since the prior loan was defaulted. This is not supposed to be a workaround to get distributions from a plan while still active.

In addition, though not necessarily applicable in this scenario, despite the default, the loan still 'exists' and continues to accrue interest, so could limit the amount of any future loan

[401_noob]

Treasury Regulation 1.72(p)-1 Q&A 19 has some additional requirements for issuing additional loans following a default.