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URL:  https://boards.fool.com/penalties-on-consumer-loans-can-be-discharged-in-32495921.aspx

Subject:  Re: Best option for paying off a 401k loan? Date:  11/28/2016  2:47 AM
Author:  aj485 Number:  311062 of 313069

Penalties on consumer loans can be discharged in bankruptcy.

If one can qualify to file bankruptcy. Those who have filed for BK within the last 7 years, or who make too much to qualify for a Chap 7 BK, so will need to enter a Chap 13 BK repayment plan don't get the debt forgiven.

It is difficult (not impossible) to discharge tax debt in bankruptcy.

Including the tax debt that one owes for forgiven debts.

The early withdrawal penalties are significant compared to most late payment penalties.

And penalty interest rates are higher than the tax penalties.

Most late payment penalties are based on the payment and not the entire amount of the outstanding debt.

Actually credit card late fees are generally a flat amount, no matter how much the late payment is. There are also additional fees (over the limit fees, NSF fees, etc.) that are unlikely to be charged on a 401(k) loan. And penalty rates are charged on the entire balance, generally once 2 or more payments are missed.

Credit cards used to be able to instantly raise rates after a missed payment. I am under the impress that regulations have restricted increases in interest rates.

Yes, by law, you now have to miss 2 payments before the rates can be increased. But the minute the 2nd payment is missed, up go the rates in almost all cases. And the rates are charged on the entire balance.

Again, I'm not saying that there aren't risks with a 401(k) loan, just like the risks with any other loan. But each individual needs to assess their own risks based on their circumstances. And I still stick to my previous advice, that one MUST have a solid repayment plan for leaving one's job, either voluntarily or involuntarily, before taking out the loan.

AJ
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