If i cash in my 401k while i am in the process of fileing for bankruptcy will I loose that money?

Asked over 3 years ago - Nanticoke, PA

If I cash in my 401 k while i am in the process of fileing for bankruptcy will I loose that money?

Attorney answers (3)

  1. David J. Harris

    Contributor Level 8

    Answered . I highly recommend that you DO NOT cash in your 401(k).

    First and most important is that a 401(k) is generally protected from the reach of your creditors and from the reach of a bankruptcy trustee. Simply, funds in a 401(k) are exempt in a bankruptcy case, but not funds are withdrawn from it.

    Second, you will incur a non-dischargeable and unnecessary tax on the money that you withdraw from the 401(k).

    Third, if you are under age 59 1/2, you will incur an early withdrawal penalty unless the withdrawal is used for qualified expenditures.

    If you wish to learn more about bankruptcy as it affects Pennsylvanians in Luzerne County, please click on to my web site (below) and review some of my blog posts.

  2. Theodore Lyons Araujo

    Pro

    Contributor Level 20

    Answered . Don't do it. File the bankruptcy before you cash out the retriement account and talk to a local bankruptcy attorney about what you should do before and after you file.

    People often ask if they can keep homes, second homes, cars, boats, tax refunds, etc., when they are contemplating Bankruptcy. I always tell them they can keep what they want of they can pay for it, or if the equity or value is protected by an exemption in their State!

    There are two types of Bankruptcy for most individuals. Chapter 7 (liquidation) and Chapter 13 (payments are made to a Chapter 13 Trustee to be distributed pursuant to a Plan you and your attorney draft). To determine of you get to keep the property you have to know two thingsā€¦

    1) What is the equity in the property? (I.e., what is it worth minus what you owe on it).
    2) Will the exemption laws that are applied to the property protect the equity?

    Bankruptcy is much more concerned with equity than it is with debt. If you have no equity in a rental home the Trustee in a 7 or 13 does not have an interest in the property and you may keep it.

    If you owe more on the vacation home than it is worth you may be able to use Bankruptcy to reduce the amount of the debt, and again, keep it.

    When you have equity in something that is not protected by an exemption then that is an issue that a lawyer must evaluate. See an attorney right away before you act.

    Good Luck!

    REQUEST: Please give this answer a "thumbs up"(below) if you find it valuable.

    Disclaimer: This answer does not constitute legal advice. I am admitted in the States of New York, New Jersey and Massachusetts only and make no attempt to opine on matters of law that are not relevant to those three States. This advice is based on general principles of law that may or may not relate to your specific situation. Facts and laws change and these possible changes will affect the advice provided here. Consult an attorney in your locale before you act on any of this advice. You should not rely on this advice alone and nothing in these communications creates an attorney client relationship. The opinions expressed herein are those of the author only and the fact that he has worked as an Assistant District Attorney; State Supreme Court Clerk; Special Assistant United States Attorney (Hawaii); Assistant Cornell University Counsel or Judge Advocate, United States Marine Corps should not be relied upon to assume that these statements reflect the policy of these organizations.

  3. Dorothy G Bunce

    Pro

    Contributor Level 20

    Answered . The only property protected when you file Bankruptcy is the property that your state has established as "exempt."

    In Pennsylvania, many of the state exemptions are listed in Pa.C.S. section 8124 , which is part of your state laws. Most states post their laws on the state website & if so, you can review these laws. In most states, money in retirement accounts is fully protected, but if you are able to put the retirement money into another protected asset, you won't lose it.

    If the money is still in the retirement, you could file the bankruptcy & then take the money out after your bankruptcy is completed. See a local bankrupty attorney for specific advice.

    Hope this perspective helps!

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