We were doing a bankruptcy petition review for a virtual bankruptcy assistant prior to giving the petition to her attorney. One mistake we found was that 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 lienholder 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 lien holder 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 lien holder on Schedule B, follow their decision.
-The 713 Training Team
www.713Training.com
Disclaimer: We at 713Training.com are not attorneys and any information provided by 713 Training should not be considered legal advice. The information in this article, and any other materials provided by 713 Training, whether delivered verbally, written or via any other means, including electronic/digital delivery and storage, is for training purposes only, and is intended for individuals who work under the direction of a licensed attorney.
