What happens to pension loans when filing for bankruptcy?
Pursuant to the 2005 bankruptcy amendments, a pension loan and other ERISA qualified and pension like loans, such as a 403(b) and 401(k) loans are nondischargeable (cannot eliminate) in bankruptcy. Other ERISA qualified loans that are nondischargeable are profit sharing, stock bonus, and other similar plan loans. After the bankruptcy case is completed, the debtor continues to owe the balance that is due on such loans.
Typically, such loans are paid back by way of a wage garnishment from the debtor’s employer.
Typically, upon the filing of a bankruptcy case, the Automatic Stay is immediately effective against all creditors. This means that upon a bankruptcy filing, a creditor is prohibited from any attempt to collect a debt or pursue a lawsuit against the debtor. However, the creditor’s right to continue to collect the “pension like debts”, as described above, is an exception to the automatic stay provision. After the bankruptcy filing, the employer may continue to deduct the pension loan payments through the garnishment.
Robert Manchel is available to discuss your bankruptcy questions at (866) 503-5655.