If you are still employed, a deemed distribution that results from defaulting on the loan makes the outstanding loan balance subject to tax and potentially to early-distribution penalty, but it does not pay off the loan. You are still required to pay off the loan either by later resuming payments on the loan, which become after-tax basis in the 401(k), or by the 401(k) using a portion of your balance to your credit in the 401(k) (which includes the outstanding loan balance) once you are eligible to receive distributions from the 401(k).
