Does a large 401K payout affect being able to file Chapter 7?

Asked over 1 year ago - Tampa, FL

My wife and I are separated and she lost her job. As a result, she withdrew the entire amount, no penalty, and used it to set up her life in another city. She took the remainder (about half of the 85K spendable portion) within the 60 day IRS window and put it into a standard IRA (Roth's are not acceptable) to ease the tax burden next year and protect it from the future trustee. She must file a Chapter 7 as we have two real estate loans upside down by $200K and she is too old to expect to pay on any 5 year plan and be able to comfortably live from the next new job she gets. Her six month income before January averaged $9,000 per month. I am wondering how long she will have to wait to file if this 401K income is considered in the six month average.

Attorney answers (3)

  1. Alan D. Walton

    Pro

    Contributor Level 19

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    Answered . The 401(k) money was for the most part earned well before the 6 month means testing period, so the distribution would not be countable. If the employer withheld 20% of the whole distribution for taxes, and as a result of the deposit to the rollover, she will anticipate a tax refund, this is an asset she will have to protect. She really needs an experienced bankruptcy attorney to make sure her ducks are in a row before filing a chapter 7.

  2. Steven Anderson Leahy

    Pro

    Contributor Level 17

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    Answered . Whenever you have assets of ANY kind and contemplating bankruptcy you need to seek out an experienced attorney to help guide you through the process. 401K loans can complicated matters, depending in the jurisdiction and local rules. Overcoming the presumption of abuse can be difficult - making Chapter 7 bankruptcy difficult. Get a good attorney to answer your questions. These questions are best answered in a confidential forum - outside the public view.

    I hope this helps.
    Respectfully,
    Steven A. Leahy
    www.chicagotaxteam.com

    Please note that the above is not intended as legal advice, it is for educational purposes only. No attorney-... more
  3. Joseph Ryan

    Contributor Level 12

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    Lawyers agree

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    Answered . I agree with my colleagues. In this case you should see an experienced bankruptcy attorney in your area. In high income, potential asset cases, the costs of mistakes can be high.

Related Topics

Bankruptcy

Bankruptcy is a legal way for people or businesses who are no longer capable of paying back their bills to clear these debts and start over.

Chapter 7 bankruptcy

Chapter 7 bankruptcy is a form of bankruptcy where your debts are canceled, but some of your assets are sold to pay off part of your debt.

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