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As financial struggles start to creep in, the debt seems to slowly increase. To make matters worse, this is also the time when it appears that everything goes wrong. The house suddenly needs a new roof, the car needs to be repaired and other unexpected expenses suddenly present themselves. As a Florida resident reviews the various financial options, it may be tempting to take out a Thrift Savings Plan (TSP) loan if the individual is a federal employee. In choosing this path, it is important to remember that this is not a traditional loan; therefore, it is not treated as such in the event that the individual decides that Chapter 7 bankruptcy is the answer to ongoing financial problems.

One of the most important aspects to keep in mind is that a TSP loan is not an actual loan. In essence, the individual is borrowing money from his or her own account. Thus, a TSP loan will not be included as a part of the bankruptcy.

Another aspect to consider is that funds placed into the TSP account are exempt from income taxes until they are withdrawn. As long as the individual continues making payments on the TSP loan, this status does not change. However, if the individual stops making payments on a TSP loan, the remaining balance becomes reportable as withdrawn funds and will likely be subject to taxation as well as early withdrawal penalties.

There are numerous options available to a Florida resident who is struggling with excessive debt. Many times, filing for Chapter 7 bankruptcy is the appropriate option. An experienced bankruptcy attorney can review the individual’s situation and make recommendations on the best way to proceed, then help put the plan into effect.

Source: fedweek.com, “Key factors to consider when filing for bankruptcy with an outstanding TSP loan“, Sept. 18, 2017