I have a 29,000.00 loan from my 401K That I am paying 800.00 per month on. My wife has been ill for 2.5 years and unable to work. Currently trying to get disability. However this has created a big burden on us. Can I stop paying on my loan and absorb the fee and tax burden. If I can't do that than bankruptcy is my only other option? Can this loan be included in that?

  • 1
    If you're heading to bankruptcy, pay back this loan, then declare bankruptcy. Tax deferred retirement accounts generally enjoy protection from bankruptcy, though it's possible a bankruptcy court might undo recent transactions.
    – user662852
    Apr 27, 2016 at 2:40

1 Answer 1


Generally, 401k loans are loans you made to yourself. So you can stop paying it, default on it and it will be considered non-qualified distribution to you (you'll pay income tax on the amount unpaid + 10% additional penalty + whatever fees the 401k provider charges).

However, if you're still employed, the loan payments may be taken automatically from your paycheck and it may be that you cannot avoid that without actually quitting - check with your employer (some 401k plans don't allow distributions as long as you're employed).

As mentioned in the comments, the ERISA allows very broad protections for retirement accounts in case of bankruptcy. So while you should talk to a bankruptcy attorney about this, the general rule is that it is better to have as much stashed away in IRA/401k accounts as possible before entering bankruptcy proceedings - because that would be the only reserves left to you.

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