Getting a big tax refund, should i wait to file?

[davie20001]

Hello:

Again, this forum is a godsend. Its basically the only thing keeping me sane as the wife and i aren't exactly on the best of terms as she is realizing that we have no money and she gets mad at me for this.

We have 70+k in cc debt, but current on mortgage, cars, etc...i have gotten so desperate to keep our heads above water that i cashed in our 401k and its all gone...damn xmas.

I have 3 great kids that i dont want to disappoint or consider their dad a failure, but i have no choice but to come to the wife and say we cant live like this anymore, we have to go chpt7...i am sure this is the break point in our marriage and it will kill me to loose my kids as i have been told by her that everything is my fault over and over.

i have spoken to a lawyer, one of the best around DC and he said our case should be a breeze.

But here is my question...we had alot of medical bills and mortgage interest, etc to claim on our taxes for 2006 (yes, i have started them to see how much of a refund i would get) and it is over 12k of refund.

Do i wait to file and spend the money first or do i file and will the court take my refund? 2k of the refund would go to the lawyer. if i spend it and wait to file, how long do i have to wait?

thanks for everything people, you are all great!

[lrprn]

What's done is done, davie....however, turning a protected asset (your 401K)that the trustee couldn't touch into an unprotected one (cash) wasn't the best choice you could have made for yourself or your family. The bk lawyer you consulted would very likely have advised you not to do that.

Also unless your 401K works differently than ours, if you can't pay back what you took out before the end of this year, you will owe taxes for this year on what you withdrew. It's going to be quite a hit too - what you removed and didn't replenish before the end of the year will be taxed at the same % of income tax as the rest of your income. Depending on how much you withdrew, you might need a lot of that $12K refund just to pay the tax bill that's coming your way.

I have 3 great kids that i dont want to disappoint or consider their dad a failure, but i have no choice but to come to the wife and say we cant live like this anymore, we have to go chpt7...i am sure this is the break point in our marriage and it will kill me to loose my kids as i have been told by her that everything is my fault over and over.

Bankruptcy is a journey often filled with intense emotion and pain. It's extremely difficult to see bankruptcy as a cold, hard financial decision to do what is best for your family in the long run, but that's just what it is. It's very hard to acknowledge and take responsibility for poor financial choices and decisions, but it's an important part of learning from our mistakes so we don't repeat them.

I hope with all my heart that your family bond is strong enough to survive the turmoil that is coming. Keep in mind the turmoil will still come no matter what you do, bankruptcy or not, because you don't have enough money to pay off your debts. Better to start fresh six months after filing than to drag the debt around for years and years with poor credit and no end in sight.

But here is my question...we had alot of medical bills and mortgage interest, etc to claim on our taxes for 2006 (yes, i have started them to see how much of a refund i would get) and it is over 12k of refund.

Do i wait to file and spend the money first or do i file and will the court take my refund? 2k of the refund would go to the lawyer. if i spend it and wait to file, how long do i have to wait?

Our Ch 13 lawyer advised us to wait to file until after we received our less than $1K refund last year and spent it on legitimate family expenses. Filing Ch 7 before April 15, several members here have already found their trustees have held up their cases for closing until the trustees see their 2006 tax returns. If you file before you receive your return and spend it, $12K will be plenty enough for the trustee to take the entire amount and turn it over to your creditors. Ask your bk lawyer what he/she advises in your case, but I'm betting he/she will advise you to wait until after the refund is in and out of your pocket (most likely used to pay your 401K withdrawal taxes and replenish your 401K account).

[Spartan]

Good advice from lrprn. You should protect the $12k as much as the law allows. Replendish the 401k is definitely should be done.

As for the wife saying everything is your fault, well, she may be just saying it. It is a hip thing to say to your hubby, SO or boyfriend. I have been hearing that my whole life.

Google "bankruptcy famous people" and tell her you are in good company, and that BK is just a strategy for revival.

[9877donna]

Your not alone...we have all gone thru this and we are here to help!

So sorry your family is not more supportive.Please know this does not make you a failure.We have all made bad financial decisions and have found ourselves in your position.All is not lost.You are taking the first step to helping you and your family have a better financial outlook.They may have a hard time dealing with the losses and sacrifices you'll have to make during this time but in the end you'll be much better off.
So many people make the mistake of cashing in a 401K account when trying to stay on top of bills and then end up filing BK anyway and end up with nothing in their retirement account.Hopefully you will be able to replenish yours with your tax return.
Good Luck to you davie20001.
I hope all goes well!
Donna

[davie20001]

you all have no idea how much the support means to me

Thank you so much for the kind words and support...this rush of emotion just came over me and tears are streaming down my face...

As for the 401k, the fund already took out the taxes when they sent me the check, which was 20%...yes a big hit, but at least i didnt feel it when i got the check.

We do need a new washer/dryer, and with 3 kids, those new front loaders are exactly what we need. I also owe my father in law 4k to pay for a new furnace that blew earlier this fall. its just been one hit after another.

And yes, it is my fault to an extent...i kept telling her not to spend money on crap as we were broke...but she kept doing it and getting mad at me for asking how much she spent, etc...she is a very hard headed person, but i love her anyway.

i will call my lawyer to see what he says about the refund, and with it, i might be able to pay off one or 2 of the cards...

thanks again everyone...much appreciated.

[IN-DEBT]

tax hit on 401k

Davie,

Welcome to this site.

First, don't feel bad about the 401k mistake. It is over and most of us have done the same thing one way or another. Some like me borrowed against a 401k, some borrowed against family only to find out they can't pay this back first under bankruptcy law and others found means to make do without going anywhere until we all ended up here. The people hear are great and you will find that most people on here know there stuff about the old laws and you will find what they don't know about the new laws they at least admit this and ask for help. You will find this out if you have a 401 k loan under the new law as these have changed only for the better. This is probably the only area of the new law that helps the debtor. I followed the advice of the mods on this site and interviewed 4 attorneys and the all agree on this issue.

I have also found from this site that there is no conformity with or within the states for bankruptcy. 4 of the 4 attorneys I talked to all said we were going to another district in my state as the northern district was harsher than the southern. So don't be afraid to pick their brains or the people on this site.

Second,You are correct in the fact the taxes were taken out, however, the 10% penalty probably wasn't so this will go against your 12,000. However, this should be slight. So, however much you borrowed, hold back 10 % or put 10% in you 401K before the end of the year. Most plans allow a lump sum at years end unless you have already put in too much which I doubt or you wouldn't be on here.

I'm only 4 months into my 60 month plan and dread what I must do but it has to be done. Just remember every case is different and every court is different as this is the part that will drive up the wall the most. The mods on here are great and very helpful. However, they will not sugarcoat everything so don't take anything personable as they are in this too and want all to prosper.

I was very upset at first that I have to do a 13 but then feel blessed that I have the income to overcome this and will get to keep my home. Take care and good luck.

[lrprn]

So glad that you feel supported, davie - that's one of the very best aspects of being a part of this forum. We are among others here who understand what you are going through because they've been there themselves.

And don't feel like you are the only one who has ever taken out money from your 401K. My husband took out six "loans" from his over the last ten years, and now our Ch 13 trustee doesn't want to let us return the money to his retirement to avoid the major tax hits and also continue to make active contributions to our retirement. At 60 and 55, we don't have the luxury of many more years to contribute to our retirements, as our lawyer noted when he filed our brief earlier this month explaining our position to our district's bk judge. Right now it looks like the trustee is going to let this go, but it's been a real struggle that has delayed confirmation of our case for months. We're still not done yet - there's one more trustee objection regarding a mismatch between our Schedules I and J....another story for another time.

It's great that your fund already took out the taxes that will be owed - that's a huge advantage for you!

i will call my lawyer to see what he says about the refund, and with it, i might be able to pay off one or 2 of the cards...

Please don't pay any unsecured debt with your refund! What you owe on your credit cards will be wiped out when you file, so giving them any money knowing you are going to file makes no sense. If you are thinking that by paying off a card or two, you won't have to list those cards on your creditor list and they won't be canceled, think again. Your credit card companies are still 99% likely to cancel the no-balance cards because the major credit card companies share bankruptcy information through a shared database.

Instead concentrate on shoring up your family's genuine needs - replenish your retirement, do house repairs, etc. Be sure to ask your lawyer how best to use the refund. For example, if you pay back your f-i-l $4K then file within 90 days, if the trustee finds out about it, that will be considered a preferential payment to an insider and your f-i-l will be compelled to return the entire $4K to the trustee. Be very careful here - always get expert advice from your lawyer. Assume nothing around paying back debt is ok to do before filing - that's how many filers get themselves into major trouble.

Hang in there - remember we are always here for support and venting as needed!