If a current employee who has been repaying a 401K loan filed for bankruptcy protection and requested suspension of the loan repayments is the company required to suspend garnishing from his wages?

Answer 1

No, they are not required to stop the deduction. The IRS requires you to repay your loan according to the terms you agreed to when you signed the check. Whether or not your employer will stop the repayments varies from one employer's plan to another. Some will stop them, some won't, and some require them to be stopped even if you don't want them to. Call your customer service center and ask for a summary plan description to get your plans rules in writing. I understand it as while 401k is exempt from seizure and claims, the loan against one is not. Those funds become just like any other and can be taken by creditors. Regardless of BK, the 401k loan must be repaid or the 401k itself (the security for the loan) automatically is used to do so (by the agreement)....basically aside from the BK process and required of all qualified 401k plans that do grant loans. However, when this happens the amount used to pay the loan is considered an early 401k withdrawal. It all becomes taxable income and the early withdrawal penalties apply too...so you will owe a substantial tax on that event. And of course, you'll have lost/used up your 401k for the same amount.