Question about withdrawing 457/401K Funds while in a Chapter 13

[john2700]

Have a few questions here in regards to cashing out my 401K/457K while already in a Chapter 13 Bankruptcy in Arizona.

I filed for Ch 13 back in 2012 and left my job in 2014. At that time I decided to cash out my 457K plan to the tune of around $150,000.00. After the taxes were removed from the withdraw I ended up with around $115,000.00.

I used the funds for some living expenses and bought some other items with the money. I did not purchase a home or car, nothing such as that.

Question is what sort of a situation will I be in when I have to send my copies of my tax returns to the trustee's office? I was under the impression that 457K plans were exempt property in a chapter 13 case.

Any idea's of what will happen to me? Will my case be thrown out? I have been current on all my case payments to date and am worried about what will happen to my case. Also I am going to hopefully be able to pay the additional taxes by the April deadline in the amount of around $30,000.00.

Thank you for any replies.

[LadyInTheRed]

It may have been an exempt asset at the day of filing, but, it is possible that the trustee will see the withdrawal as income available to your creditors. I don't know if that is the case. But, if it is income that merely replaced the income you were earning before without exceeding it, it shouldn't make any difference. You really need to talk to your attorney, which you should have done before making the withdrawal or any other large financial move during a Chap 13.

[justbroke]

This is definitely a question for an attorney. There are so many factors which come into play. One factor may be whether you were eligible to take a distribution, without tax, because you were over 59.5 years old. Paying 65K in taxes makes me believe that this was a regular distribution and subject to penalty. Are you in a 3-year plan or 5-year plan?

I don't have any direct experience with withdrawing from a 401(k) during the pendancy of a Chapter 13 case. As LITR wrote, the Trustee might read it as "additional" income.

Although it would have been a little tedious and money would have been tight, you had an opportunity when you lost your job. You could have had the Plan payments deferred and then converted to a Chapter 7. In your particular case, I can speculate all I want, but only a bankruptcy attorney that practices in your State/District is going to be able to answer your ultimate question.

I wish you had posted this question before you raided the retirement account.

[Drazil65]

Did you lose your job or quit? Did you get any kind of advice on the penalty? taxes? anything? If not, get yourself to your attorney (bankruptcy) or a tax attorney, pronto!

[AngelinaCat]

And I always advise to leave exempt--especially Retirement Funds--alone. You will never likely be able to repay it and the income tax penalty will hit hard.

"Hub and I did exactly that trying to stave off BK. Didn't help at all, and only made our situation worse. It wasn't the worst thing we did on our way to Bk, but definitely one of the worst.

[toojerm]

If you are in a 100% payback. Then the trustee doesn't care.