401K Funds in Chapter 7 Bankruptcy

[grammapaula]

My question involves bankruptcy in the state of: Illinois. I recently got caught in the housing market mess in FL & home is in foreclosure there. Home values plunged there about $200,000 in a year. I moved back to my home state of IL. I have sought work for 1-1/2 years. I have borrowed funds from relatives for moving & living expenses. When I went to apply for food stamps in March, I was told I could accesss 401K funds, which I didn't know. I got about $20,000.00 after taxes. I repaid amounts borrowed from my sister, mother & brother. Later (in July), at the suggestion of a friend, I filed a Chapter 7 bankruptcy in IL. The bankruptcy trustee is trying to make my relatives repay these funds (total of about $5,000). The trustee is also threatening to make me repay the remainder of the funds into the court but I have very little of the funds remaining as I have been living on them.

I am confused as my atty. had told me the 401K funds would be based on the more liberal Fed. bankruptcy laws & would be exempt. Also, I am not sure if the trustee can garnish future wages or future tax refunds. Thank you for any assistance.

[Betty3]

Money in retirement accounts (such as 401k) is exempt while it is in there. If you take any money out, then it is considerd/handled like any other money/cash. You also used the money to pay back just certain creditors (family members) & not others. You did all of this within just a few months of filing bankruptcy.

Talk to your bk attorney.

[grammapaula]

Thank you, Betty3. I have always had excellent credit before the FL housing market went bust. I fully intended to sell the house & pay off any remaining debts but that did not happen. My relatives loaned me funds for the move back to IL & immediate emergency living expenses. I repaid these with my 401K funds in March, 2008. I had no intention of filing bankruptcy until later (June, 2008). My bankruptcy atty. told me my 401K funds should be exempt, no matter if I had cashed them in, although he did say the trustee might try to show family preference. He did some sort of research at the request of the trustee (something about 2-years in FL beforehand) & stated that he found I was covered by more liberal federal law regarding the 401K. Not sure what all this means.

I have only enough funds for one more month & the trustee has already written letters to my relatives to repay the funds & a letter that I will need to repay the remainder (which I no longer have). She seems out for blood. All I have left are some old household furnishings, my pets, personal items & a 1999 car.

My bankruptcy atty. is not being very helpful.....Thanks for any advice.

[Betty3]

I don't know what the trustee decided after talking to your attorney. You will have to ask your attorney. It really wasn't a good idea to cash in your 401k & pay back family members for loans shortly before filing for bankruptcy. If the trustee demands the money back, your family members will be out all that money (& you in a sense too). It seems the trustee *might* also want back what you didn't pay to family members though you did use that money for *living expenses* for yourself. You need to talk to & ask your attorney all of your questions.

[gigirle]

My bankruptcy atty. told me my 401K funds should be exempt, no matter if I had cashed them in, although he did say the trustee might try to show family preference. He did some sort of research at the request of the trustee (something about 2-years in FL beforehand) & stated that he found I was covered by more liberal federal law regarding the 401K. Not sure what all this means.

This means that the trustee told your attorney to do some homework. You need to contact your attorney and see what the result of his legwork was. Ask your attorney what "liberal federal bankruptcy law" he is refering to.

[Betty3]

Agree, that's why I also told her to talk to her attorney because I don't what the trustee decided after talking to the attorney about the research he was asked to do.

[grammapaula]

Thanks for your replies. I have worked in the legal field for 36 years but don't know much about bankruptcy. I will call my bankruptcy attorney tomorrow and hopefully can get more informatio from him. There is another hearing on 10/7 but he said I don't have to go. I know the trustee has sent letters to my sister & brother to repay the funds but I know my sister doesn't have the funds. I also don't have any funds left. My brother & sister are sending letters to the trustee. I am not working at present & almost out of funds. The trustee also sent out a few other letters to creditors that she is liquidating assets & be sure to send in their forms. I don't know what assets she is liquidating as I don't have anything. I didn't know when I pulled out my 401K funds that I would be filing bankruptcy later. I wish I had never filed now. I asked my bankruptcy attorney if I could just dismiss the bankruptcy & he said no. I am worried that this trustee will try to garnish future wages & go after any future tax refunds also. What a mess.

[Betty3]

Agree, call & talk to your bankruptcy attorney. Hopefully things will work out. Good luck.