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.
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.
Steven A. Leahy
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.
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.