Second Loans from Retirement Accounts

Q: My client has an outstanding defaulted loan, and is requesting a second loan. Can the second loan be granted if the repayment is set up to come automatically from the client’s checking account?

A: No. First of all, check the plan document since some employers will simply not permit another loan when there is an outstanding defaulted loan. If the document does permit such a loan, repayment MUST be made through payroll deduction, unless outside collateral is held for the loan. Since I have not heard of any provider permitting outside collateral, the bottom line would be payroll deduction to repay the second loan. Without payroll deduction repayments, the second loan must be declined.