401(k) and Retirement-Plan Loans in Bankruptcy

How does a 401(k) loan actually work in bankruptcy?

A plan loan is unusual because both sides of it are you. You borrowed from your own retirement account, and the repayments go back into that account rather than to a bank. Bankruptcy is a process for resolving what you owe to other people, so a debt owed to yourself does not fit the machinery in the same way.

That structure shapes everything else. There is no creditor to file a proof of claim, no one to sue you, and no balance for a discharge order to wipe out. What exists instead is a reduced retirement balance and a set of plan and tax consequences if repayment stops.

11 U.S.C. § 541 defines what becomes property of the bankruptcy estate when you file, and § 522 governs what you can exempt from that estate. Retirement funds in an account exempt from taxation under Internal Revenue Code sections 401, 403, 408, 408A, 414, 457 or 501(a) may be exempted under § 522(b)(3)(C). Your outstanding loan balance sits inside that same protected structure.

What changes the answer for your situation?

Several facts move this question in different directions, and most of them are about timing and about which chapter you file.

Whether you keep repaying matters most. If your payroll deductions continue, the loan winds down on its plan schedule and bankruptcy does not interrupt that arithmetic. If they stop, the plan and the tax code, not the bankruptcy court, determine what happens to the outstanding balance.

Employment matters too. Many plan loans accelerate when the job ends, and losing work is often what pushed the filing in the first place.

Chapter choice changes the setting. Chapter 7 is a short liquidation case. Chapter 13 runs for years on a court-confirmed plan, so a repayment that continues throughout the case becomes part of the budget the trustee reviews.

When you borrowed matters as well. Money withdrawn or borrowed shortly before filing and then spent on ordinary living expenses or on some creditors and not others is exactly the kind of pre-filing activity a trustee asks about.

What does federal bankruptcy law say about retirement funds?

The Bankruptcy Code addresses retirement money in two places that work together.

Section 541 creates the estate at the moment a case is filed. Subsection (a)(1) sweeps in "all legal or equitable interests of the debtor in property as of the commencement of the case," subject to the exclusions in subsection (b). Section 541(b) then lists categories of property that the estate does not include.

Section 522 handles exemptions. Section 522(b)(1) lets an individual debtor exempt property from the estate, choosing between the federal list in § 522(d) and the alternative in § 522(b)(3). And § 522(b)(3)(C) covers "retirement funds to the extent that those funds are in a fund or account that is exempt from taxation under section 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code of 1986."

Section 523 lists the debts a discharge does not reach. A plan loan is normally analyzed under the property and exemption provisions rather than as a creditor claim under § 523.

• 11 U.S.C. § 541 — what becomes property of the estate, and what is excluded
• 11 U.S.C. § 522 — the exemption a debtor may claim, including retirement funds
• 11 U.S.C. § 523 — the exceptions to discharge
• 11 U.S.C. § 362 — the automatic stay that halts collection activity on filing

Where do state and local rules change this?

Two layers sit on top of the federal answer, and both vary.

State exemption law is the first. Section 522(b)(3)(A) points to the exemptions available under the law of the state where you were domiciled during the period the statute describes, and states protect retirement money in different ways. Massachusetts, for example, exempts interests in ERISA plans, Keogh plans, section 401(a) plans, Simplified Employee Plans, section 403(b) annuities and IRAs from the operation of insolvency law, with limits on deposits made within five years before filing (Mass. Gen. Laws ch. 235, § 34A). Delaware exempts assets held under a retirement plan but expressly allows a participant to grant a security interest to secure a plan loan (10 Del. C. § 4915). Hawaii and Alaska have their own provisions, and Alaska's exemption does not reach contributions made within 120 days before filing (Alaska Stat. § 09.38.017).

The second layer is local bankruptcy procedure. Chapter 13 plan content, valuation and modification are governed by each district's local rules. Your state hub page is the place to start.

What does this look like in a real chapter 13 case?

Chapter 13 is where plan loans come up most often, because the case lasts for years and the household budget is on the record the whole time.

A chapter 13 case runs on a written plan that the court confirms. Districts set their own requirements for what the plan must contain and how it can be changed. In the Central District of California, for example, a confirmed plan's terms can be modified only by court order on a motion to modify or by stipulation with the chapter 13 trustee, and the debtor must give the trustee copies of tax returns filed while the case is pending (C.D. Cal. LBR 3015-1). Districts also set their own confirmation objection deadlines; in the Southern District of Florida an objection to confirmation is timely if filed at least 14 days before the confirmation hearing (S.D. Fla. LBR (2026 consolidated)).

The practical point is that a plan loan repayment continuing out of your paycheck is visible to the trustee, and how it is treated is a district-specific and case-specific question rather than a single national rule.

What documents and information will you need?

Gathering these before you talk to anyone saves time and produces a more accurate picture.

The filing itself carries fees. A Chapter 7 case has a $245 filing fee (28 U.S.C. § 1930(a)(1)(A), (f)(1)) plus a $78 administrative fee and a $15 trustee surcharge (Bankruptcy Court Miscellaneous Fee Schedule, Items 8 and 9, effective December 1, 2023). A Chapter 13 case has a $235 filing fee (28 U.S.C. § 1930(a)(1)(B)) plus the same $78 administrative fee.

• Your most recent plan statement showing the account balance and the outstanding loan balance
• The loan agreement or promissory note, including the repayment schedule and what happens if employment ends
• Recent pay stubs showing the loan deduction as a separate line
• The summary plan description, which states the plan's rules on default and acceleration
• Any Form 1099-R the plan has issued to you for a prior deemed distribution
• Your federal and state tax returns, which a chapter 13 trustee will ask for during the case
• A record of any hardship withdrawal or new loan taken in the months before filing

What should you ask a bankruptcy lawyer?

These questions get at the parts that turn on your district, your plan and your numbers, none of which a general article can settle.

An attorney can also tell you whether anything in your recent history — a loan taken to pay one creditor, a hardship withdrawal spent on living costs — deserves attention before a case is filed rather than after.

• Given my state and how long I have lived there, which exemption set applies to my retirement account?
• Does my plan loan repayment belong in my chapter 13 budget, and how does the trustee in this district treat it?
• What happens to the outstanding balance if I lose this job during the case?
• I borrowed from my 401(k) within the last year — is a trustee likely to ask about how I spent it?
• Should I keep making loan repayments while the case is pending, or is that a question for the trustee?
• What are the tax consequences if this loan is treated as a distribution, and who should I ask about that?
• Are there filing-fee installment or waiver options in my case?

Frequently asked questions

Can a 401(k) loan be discharged in bankruptcy?

Generally no, because there is no outside creditor holding the debt. You borrowed your own retirement money, so a discharge order has no third party to release you from. The Bankruptcy Code addresses retirement accounts through the property and exemption provisions in 11 U.S.C. §§ 541 and 522 rather than by treating a plan loan as an ordinary creditor claim.

Is my 401(k) itself safe if I file?

Retirement funds held in an account that is exempt from taxation under Internal Revenue Code sections 401, 403, 408, 408A, 414, 457 or 501(a) may be claimed as exempt under 11 U.S.C. § 522(b)(3)(C). State law adds a second layer that varies — Massachusetts, Delaware, Hawaii and Alaska each have their own retirement exemption statutes with their own limits. Ask a lawyer which set applies to you.

Should I borrow from my 401(k) to avoid filing?

That is a decision to make with advice, not from an article. What is worth understanding first is the tradeoff: money inside a tax-exempt retirement account may be exempt from the bankruptcy estate under 11 U.S.C. § 522(b)(3)(C), and money you withdraw and spend on creditors generally is not. Borrowing converts protected savings into payments that bankruptcy might have addressed differently.

What happens to my TSP or 403(b) loan?

The same analysis generally applies. 11 U.S.C. § 522(b)(3)(C) covers retirement funds in accounts exempt from taxation under Internal Revenue Code sections 401, 403, 408, 408A, 414, 457 or 501(a), which reaches 403(b) plans and government plans alongside 401(k) plans. Your plan's own loan terms — particularly what happens when employment ends — control the repayment side.

Does the automatic stay stop my 401(k) loan payroll deduction?

The automatic stay under 11 U.S.C. § 362 halts collection activity by creditors on claims that arose before filing, and § 362(b) lists situations the stay does not reach. A plan loan repayment is not an outside creditor collecting a claim, so it does not fit the ordinary stay analysis. Whether the deduction continues in your case is a question for your attorney and the trustee.

What happens if I stop repaying the loan?

The consequence usually comes from the plan and the tax code rather than from a lawsuit. Plans commonly treat an unpaid balance as a distribution, which creates a tax reporting event and permanently reduces the retirement balance. Because there is no outside creditor, there is generally no collection suit and no wage garnishment to worry about — but the tax consequence is real and worth asking a tax professional about.

Does it matter whether I file Chapter 7 or Chapter 13?

Yes, mostly because of case length. Chapter 7 is a short liquidation case. Chapter 13 runs on a court-confirmed plan over years, so an ongoing payroll deduction becomes part of the budget the trustee reviews and the court confirms. Districts set their own plan requirements and confirmation procedures, so the treatment of a continuing repayment is district-specific.

Sources

• 11 U.S.C. § 541 — Property of the estate · official source
• 11 U.S.C. § 522 — Exemptions · official source
• 11 U.S.C. § 523 — Exceptions to discharge · official source
• 11 U.S.C. § 362 — Automatic stay · official source
• Mass. Gen. Laws ch. 235, § 34A — Annuities, pensions, profit sharing or retirement plans; insolvency; attachment
• 10 Del. C. § 4915 — Exemption of retirement plans, life insurance contracts, and annuity contracts
• Alaska Stat. § 09.38.017 — Exemption of retirement plan interests and payments
• Haw. Rev. Stat. § 651-124 — Pension money exempt
• Cal. Civ. Proc. Code § 704.115 — Retirement plan exemptions
• C.D. Cal. LBR 3015-1
• S.D. Fla. LBR (2026 consolidated)
• Bankruptcy Court Miscellaneous Fee Schedule, Item 8
• Bankruptcy Court Miscellaneous Fee Schedule, Item 9
• 28 U.S.C. § 1930(a)(1)(A), (f)(1)
• 28 U.S.C. § 1930(a)(1)(B)

Related

• Exemptions: what they protect
• Which debts get discharged
• Chapter 7
• Chapter 13
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