Cash out 401k to pay bk legal fees?

[sobeit]

I met with an attorney on Friday and confirmed I would need to finance a car in order to file for a 7, and up my 403b (nonprofit version of 401k) contributions to 6%. The car part is taken care of. Unfortunately, I do not have the $1,200 for the lawyer fees, nor $300 for filing fees, and won't for some time, even when I stop paying my credit cards.

I have about $1,900 in my retirement account right now. Just enough to cover the fees for the bk. I know I'll have to pay a bunch of taxes, but the amount in there is really peanuts, and I need the bk to move forward. I am worried they won't let me withdraw my balance but keep the account open with the increased contribution that will allow me the bk.

Anyone who can share an experience they had with something like this?

[keepinitreal]

We took a hardship withdrawal of a 401(k). After the withdrawal, we were not allowed to contribute to it for the next 6 months. So, if you're going to need to contribute 6% to qualify for Chapter 7, verify that you will be allowed to continue contributing immediately following your withdrawal.

[justbroke]

As keepitreal points out ever so clearly, taking a hardship withdrawal would affect your ability to actually contribute! Some companies will restrict contributions for as much as one (1) year after a hardship withdrawal. Also, there can be tax implications. You'll be hit with a 10% early withdrawal penalty ($190), plus you'll pay taxes on it as well ($190-$741). You may also have problems where your 401(k) plan will only let you withdraw "your" contributions and not any company match, so you may have less than $1,900 to withdraw.

Try to find money elsewhere. Perhaps not paying your credit cards or something else will get you the money you need. I would avoid a hardship withdrawal by all means.

[sobeit]

It would take me many, many months of not paying my credit cards to get the money together for the bk attorney and court fees. And while I know that I will be taxes a ton on the withdrawl, a ton on 2k isn't that much, and to be able to file sooner rather than later would be worth it to me.


If I was not able to contribute for awhile, wouldn't the coursts just look at the last 6 months average of my contributions anyway? Or would they see the most recent paystub of no contribution and consider that?

[HHM]

Assuming your plan provider allows it, you CAN take a 401K withdrawal to pay attorney's fees, doing so will NOT affect your BK. But I would only do this tactic as a last resort.

I appreciate that need to get your case moving, but if the attorney offers a monthly payment plan and there is no pressing emergency (being sued, garnishment, foreclosure), it would be better to go that route than take a 401K withdrawal/loan.

[BCA2009]

I agree to check into the suspension of contributions issue. But I did take the money out of my IRA to pay for my BK and it was the best solution for me. I needed to file immediately and didn't have time to save up the fees.

I agree it should be a last resort, but if your situation was like mine, waiting to file could have jepordized my ability to qualify for Chap 7. It was the best $1,700 I've ever spent.

As a matter of fact, I took mine out in December (filed on 12/31/09). I took out $5000 from my IRA. Used $1,700 to pay attorney and $3,300 to pay upcoming tuition for my child. When I completed my taxes I owed $67 to Uncle Sam. Had I not taken the withdrwal I would have gotten a refund $1,670. Oops, the Trustee would have gotten $1,670 and might have questioned my withholdings amount. Since I was already an asset case that money would have gone to my creditors. I know this was unique and the timing was just right, but it worked out for me.

Good Luck

[sobeit]

Thanks everyone.

Just learned that I would need to suspend contributions for 6 months. Now what I need to find out is if I can claim the previous 6 months contribution as averages, or if they will look at it as no contributions going forward. My lawyer and I discussed increasing my contributions by about $100/month, and getting a car payment of about $200 a month, but the car payment is $290, so I may be OK without the contributions anyway.

I know I stand to lose about $500- $600 on this deal with the taxes. But I too am in a case where if I wait longer, my income averages for 6 months will increase slightly, making my case even more borderline. And the stress of putting this off would make me really miserable. Losing out on a few hundred bucks vs getting this over with is worth it to me.

[justbroke]

You can't claim contributions to a qualified retirement plan as an expense in a Chapter 7. So it wouldn't matter anyway, except in a hypothetical Chapter 13 test.

[sobeit]

Interesting...The thing is, I pass the means test no problem. The issue is in breaking down the expenses, which puts me slightly above the line between 7 and 13. I get caught on the non mortgage expenses portion, because in actuality, my utilities are about $200 less than the federal allowable.

I have spoken to two attorneys, both of whom recommend increasing my retirement contributions to bring me into Chapter 7 eligibility.

[JackBondLove]

Assuming your plan provider allows it, you CAN take a 401K withdrawal to pay attorney's fees, doing so will NOT affect your BK. But I would only do this tactic as a last resort.

I appreciate that need to get your case moving, but if the attorney offers a monthly payment plan and there is no pressing emergency (being sued, garnishment, foreclosure), it would be better to go that route than take a 401K withdrawal/loan.

I've often wondered how someone could pay attorney's fees on time. I mean, it seems that the attorney would be extending credit to purchase his legal services, but wouldn't that be discharged in Chapter 7? Or perhaps because Chapter 7 is being filed, that the debtor is fully acknowledged that he is insolvent, and therefore the trustee automatically makes the attorney debt as non-dischargeable? Or perhaps (equivalently) there is an automatic rule that the attorney's fees are always considered non-dischargeable?

[HHM]

I've often wondered how someone could pay attorney's fees on time. I mean, it seems that the attorney would be extending credit to purchase his legal services, but wouldn't that be discharged in Chapter 7? Or perhaps because Chapter 7 is being filed, that the debtor is fully acknowledged that he is insolvent, and therefore the trustee automatically makes the attorney debt as non-dischargeable? Or perhaps (equivalently) there is an automatic rule that the attorney's fees are always considered non-dischargeable?

Let me fill in the blank, I don't mean for the debtor to pay attorneys fee on a monthly payment plan AND file the case. The idea is that the attorney will accept payments over a period of time, and then when the FEE is paid in FULL, file the case. Thus, if nothing is pending, the person should start with the payment plan, and then if an emergency arises, get money from a 401K.

[justbroke]

I have spoken to two attorneys, both of whom recommend increasing my retirement contributions to bring me into Chapter 7 eligibility.

All fine and dandy unless and until the UST challenges the expense which is clearly not allowed. However, and generally speaking, the UST's office has better things to do than badger under-the-median income filers.

[sobeit]

Yeah, the problem is I'm about 500 a month over the median.

I pass the means tests just fine, coming out at a 60 month disposable income of $4,320. My unsecured debt is 40K. I think I'm shorting myself with the schedule J though. For stuff like "household repair and upkeep" and "transportation," which is so variable and unpredictable, can you just put in the difference of the federal allowable amounts, minus actual expenses (utilities, car payment, insurance)? For instance, $413 is my local standard for nonmortgage housing and utilities. My utilities are about $193 a month. Can I claim around $220 a month for the home maintenance line 3 on schedule J without raising eyebrows?

[BCA2009]

Electricity, water, sewage, gas, garbage and pest control all for $193 a month. that's cheap! Are you sure you averaged the higher winter and summer months in?

[sobeit]

I have electric heat and appliances, no gas, so yeah. I also have a 840 square foot house and live alone. Pest control? Can I count ant baits? ; )

I called the utilitiy companies and these figures are based on yearly averages. Sigh. As my attorney said, "You're a very thrifty girl." Ironic.

Since I've pulled this post off topic, I'm going to start a separate thread with a draft schedule J to solicit input from all you helpful folks!