Quick Tip: When does a 401K Loan Become a Wage Garnishment?

Today I was doing a bankruptcy petition review for a virtual bankruptcy assistant prior to giving the petition to her attorney. One mistake she made was in listing the 401K Loan as a Wage Garnishment. Since many people make this same mistake, I hope this article will help you to improve your skills.

First of all, never confuse any deduction coming out of a paycheck with a wage garnishment. A wage garnishment is a legal procedure that is conducted by a collector attempting to collect a debt. The collector has filed a lawsuit, obtained a judgment from a judge and filed the legal paperwork with the court to get permission for a wage garnishment to take effect. In other words, a wage garnishment forces someone to pay a debt they refused to pay on their own.

However, a 401K Loan that is being paid through payroll deduction is not in any stage of the collection procedure. Instead, the debtor went to their employer, asked to borrow a certain amount of money against their 401K. After borrowing the money the debtor agreed to have the monthly payments made through payroll deduction. Therefore, payroll deduction is not a wage garnishment.

One big difference between the two is that a payroll deduction is a voluntary payment made by the employee and a wage garnishment is the result of a lawsuit filed by a company the debtor owed money to. The debtor did NOT make a voluntary request to deduct money from their paycheck for a wage garnishment. Instead, the collector must force the debtor to pay the debt through a legal process known as a wage garnishment.

Secondly, wage garnishments are stopped the moment a bankruptcy petition is filed because the Bankruptcy Stay goes into effect. Do a search online for the term [wage garnishment] and you will find a paragraph that is part of the legal paperwork. This paragraph states that the filing of a bankruptcy petition automatically stops a wage garnishment. Naturally, the debtor does not want to stop the repayment of a 401K Loan, which is another difference between a payroll deduction and a wage garnishment.

What is the Proper Way to List the 401K Debt on the Bankruptcy Petition?

Method 1: Since a 401K is an asset, most bankruptcy courts I have worked with prefer to have the 401K listed on Schedule B with a lien attached to it. The leinholder would be the employer.

Method 2: Other bankruptcy courts require the 401K loan deduction to be listed on Schedule I since it is being paid through payroll deduction. The 401K is still listed on Schedule B as an asset but no lien is attached to it since this information appears on Schedule I.

Because both methods 1 and 2 are allowable, if this is your first time working for an attorney, you may want to use Method 2. Then, make a note on the Attorney Cover Sheet and let the attorney know that you did not list the employer as a lienholder on Schedule B. Instead, it is shown on Schedule I because the payment is made through payroll deduction. If the attorney wants you to add the employer as a lienholder on Schedule B, follow their decision.

Look for more tips like these to come your way soon.

Disclaimer:

The information in this article should not be considered legal advice. It is written by Victoria Ring, a certified paralegal and bankruptcy training instructor. All information is subject to the guidance of licensed bankruptcy attorneys in your U.S. state.

Victoria Ring
http://www.713training.com
http://www.713attorney.com
http://www.713bankruptcy.com
http://www.navba.org
http://www.servantofjesuschrist.com

This entry was posted in Bankruptcy Training Other and tagged , , , , , , , , , , , , , , , , . Bookmark the permalink.