401K Withdrawal Question...HELP!!!

[buster123]

Hi everyone. I'm new to this board and need to start off by saying it is great to have such a wealth of info to read and digest. Thanks!!

My wife and I are getting ready to file Chapter 7. We retained our attorney and are getting our paperwork together. Hope to file in about a week or two.

I'm worrying about my 2009 tax return. It shows a $58K disbursement from my 401K on the return. This was from a 30K loan we took in Jan 2008 for home renovations. We were having problems keeping up the payments and decided to take it as a withdrawal in Jan 2009 (a year later), and withdrew the rest to pay for the taxes and penalties. What was left (about $20K) we used to pay down some credit cards.

Even though half of the withdrawal happened almost 3 years ago and the rest almost 2 years, I'm nervous because it shows up on my most recent tax return. When my case is being reviewed, will this withdrawal raise some sort of suspicion of abuse or something? This is making me crazy... we are in such a hole and I just need to wipe the slate clean and start fresh.

[13for60]

buster:

Let me be sure I understand this: You withdrew the $$, the defaulted on the payments resulting in your 401(k) investment house sending you a 1099-D (or whatever) and having to report that on your taxes. Now you're stuck with approximately 15% federal, plus the 15% federal penalty, and whatever your state does to you.

The first thing that comes to mind is that you're only responsible for the portion that wasn't paid back. Small potatoes, but every little bit counts.

It is my understanding that when income taxes can be discharged in BK, they have to be like three or four years old. In any case, there should be no perception of abuse - you used the $$ for legitimate expenses. I'm in the same boat - our 401(k)s are heavily leveraged. We went with a Chapoter 13 in order to NOT let go of our retirement accounts. One or the other had to happen...

IMHO - which isn't worth a dime - you're golden. You're just like me and everyone else on this board - we're obsessing over details while we work our way through the great unknown. Many have passed this way before us and they all managed (at least that is what I keep telling myself). Your attorney will help you get it figured out and prepare you for what lies ahead.

Keep checking this board and asking questions. It will all work out.

--13for60

[buster123]

13for60:

Thanks for the reply.

I may not have explained my self well enough. I paid the taxes and am all set with what I owe regarding the 401K. I'm just worried that the dispursement shows on my 2009 taxes and when the trustee reviews my case, he/she will wonder where all thet $$ went and flag my case for abuse or something. I know it was 2 - 3 yeas ago but because of timing it is on my 2009 tax return and it's making me freak out.

Thanks again for the response... it's nice not to feel alone!

[tcreegan]

Hi buster123,

Be ready to show where the $$ went in case you are asked, but making bad financial decisions is pretty much how we all end up here. The critical time frame is the 6 months prior to filing. The avg of these 6 months is your income for the BK going in, and what you expect to make is your income going out the other side. 2-3 year old stuff? Not relevant unless outright fraud.

Most likely scenario? Nothing

2nd most likely scenario? Trustee asks about it and you explain what happened. End of story.

Take a deep breath...let it out slowly....relax...

Tom in Colo

[13for60]

Buster:

I think the deal is that the COurt would have to prove that there was some sort of deception regarding your finances that began three years ago. Hell, we didn't consider doing a Chapter 13 until September. Whatever you did, I'm sure you acted in good faith, so proving abuse is that much more difficult.

There have been discussions on this board involving people who appear to be abusing the system and other board members making judgements on those actions. The way I see it, the laws are written the way they are written and if we can use them to our benefit, then good for us. All that matters is that we're all honest with what got us here and how we handle it. So if you fully advise your attorney, you're still golden.

Our 341 meeting is next week and we're petrified. We've been honest and we're willing to pay to make everything work out, but we're totally scared to death about how things will eventually shake out. We're just trying to let things happen and roll with what comes at us. I am guilty of overcomplicating things sometimes, and this has been no different.

Deep breath - baby steps - ask lots of questions and there will be no surprises.

--13for60

[buster123]

Thanks Tom & 13for60,

Again, it's nice to have a forum for these questions. I'm going to try to worry less and push on... it's really hard because I can think of a million things to worry about but I'm probably being overly-critical of myself as well. This is deffinity a learning experience and being about a week into things I've DEFFINITLY learned my lesson already... cash budget for us from now on. I'm actually looking foward to paying cash for groceries and other needs.