What happens to my 401k loan in bankruptcy?

It depends on which type of bankruptcy.

In a chapter 7, you just keep paying on the loan.

In a chapter 13, it’s a little different.  You keep paying on the loan.  Unfortunately, if your loan term ends during the 36-60 months of your chapter 13 plan, your payment changes when the loan is paid off.  Once the loan is paid off, you get to start contributing that “extra income” to your creditors as part of a chapter 13 plan.  Chief Judge Thurman ruled in In Re Kofford, 12-29134, that once your 401k loan is paid off, you have additional money left over each month to pay your creditors.  This extra money then needs to be contributed to your creditors.

So, let’s say that you’re in a 60 month chapter 13 plan.  Your payment is only $100 a month.  But, you have a 401k loan that will be paid off in the next two years, and you’re paying $150 a month into that 401k repayment.  Then once those 24 months are up, you have to increase your chapter 13 payment up to $250 a month for the next 36 months of the plan.

This means that if you are considering bankruptcy, you should really talk to a bankruptcy attorney before you take out any kind of retirement loan.  Otherwise, it may make your bankruptcy much more expensive than it should be.