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

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.

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Attorney answers 3

Posted

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.

Asker

Posted

In this case, about 50% of the 20% withholding can be credited back to the individuals tax account with the IRS next year, but it must be applied to any other taxes due from the individual and cannot just be "paid" back to the individual...or does a trustee see it differently?

Alan D. Walton

Alan D. Walton

Posted

Whatever the refund will be is an asset, which, if not exempted, will be available to the trustee. That's why she needs competent legal assistance.

Posted

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-client relationship is created or is intended to be created hereby. You should contact a local attorney to discuss and to obtain legal advice.

Posted

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.