Ooops! Don't make the same mistake.

[ToughSpot]

So I'm getting ready to file 7 and have everything pretty well lined up. Until today when I told my lawyer that I took a $25,000 401k loan back in September and gave it to my Father for "safe keeping". My thinking was I would have him pay my mortgage for 5 or 6 months just to be safe. If I put the money in my account perhaps an angry creditor could take it. I figured since the money was only being held on my behalf and used for my creditors all would be fine. Well now I am being told that I should wait a year to file and even if I get all of the money back now. So it would have gone from me to my Father and back to me inside of 60 days that I risk having my whole case thrown out.

Anyone have thoughts on this. Did I really screw up that badly? Can I fix it?

Thanks for the help.

[justbroke]

Yes, you really messed up on this one. You will definitely need to consult with your attorney to figure out how to get those funds back as exempt funds.

Now, don't take me the wrong way, but there appears to be more to it than you gave it to your father for "safe keeping". The 401(k) is the safest place from creditors. So, I don't understand the "safe keeping" aspect.

I don't think your issue is that your case would be thrown out... it would be that the Trustee would seek to recover that money and give it to your unsecured creditors! (Of course, after the Trustee gets their commission out of it!) That's a lot of money.

You should listen to your attorney, but I might be inclined to suggest that you get a few more consultations to be sure. On the face of it, what you did would be considered fraud. That is, you took the money out (which was exempt and protected) to give to your father instead of putting it into a bank account (where the creditors could get to it). So you "hid" the money so that your creditors couldn't get to it. Now fraud is a strong word, but I don't mean it in the criminal sense... only the "intent" to keep creditors from obtaining property (your money).

I still don't get it though. Did your father actually pay your mortgage? Did you use the money for anything else?

[ToughSpot]

Thanks for the reply. Yes he actually paid my mortgage from that money. I think I am going to have him give me back what's left and after another couple mortgage payments, property taxes and paying my lawyer the balance will be low enough that my wild card would cover it.

I understand that it was exempt in the 401k but we were quickly running out of cash and we needed the 401k loan to bridge the gap for a few months until we filed and I could start increase my income which had to be kept low to qualify for the means test. Since we are behind on a few account with the bank that we do regular checking at I didn't want to leave the cash there and didn't think we could open another bank account elsewhere due to bad credit. Hence the ill conceived plan to use Dad as the bank.

It was all really quite innocent although I can now see how it looks bad from the outside. I think the best plan is to have him give me a check for the same amount I have him and not list the asset transfer as it is canceled out. Unless the trustee asks for bank statements it'll fly under the radar. If the ask for statements and ask about the transaction it's a simple I loaned him the money for a month and he gave it back.

[keepmine]

If you think you have problems now just wait until you run this new plan by your lawyer. You're about to add fraud and perjury to your bk.
Plain and simple-you have an insider transaction and you need to wait at least a year before you file.

[StartingOver08]

To add a little to keepmine's post: you can not "undo" the transaction - they do not cancel one another out as you would like them too. First, the Trustee will look at your bank statements. Not all Trustee's look at all bank statements, but most Trustee's look at least at some of them. This varies widely from district to district but the main point is you are attesting in a legal document (the petition) and under oath (the 341 and the petition) that everything you have stated is true. Your plan involves misstatement of fact which at a minimum will get your case dismissed.....

You have made a serious error in judgement, the way to fix it is by waiting one year past the transaction date to file. Insider payments have a look back period of one year.

[OhioFiler]

Thanks for the reply. Yes he actually paid my mortgage from that money. I think I am going to have him give me back what's left and after another couple mortgage payments, property taxes and paying my lawyer the balance will be low enough that my wild card would cover it.

I understand that it was exempt in the 401k but we were quickly running out of cash and we needed the 401k loan to bridge the gap for a few months until we filed and I could start increase my income which had to be kept low to qualify for the means test. Since we are behind on a few account with the bank that we do regular checking at I didn't want to leave the cash there and didn't think we could open another bank account elsewhere due to bad credit. Hence the ill conceived plan to use Dad as the bank.

It was all really quite innocent although I can now see how it looks bad from the outside. I think the best plan is to have him give me a check for the same amount I have him and not list the asset transfer as it is canceled out. Unless the trustee asks for bank statements it'll fly under the radar. If the ask for statements and ask about the transaction it's a simple I loaned him the money for a month and he gave it back.

As long as your scheme was quite innocent don't you think the court will understand?

Justbroke is correct. Something doesn't make any sense at all here. Withdrawing $25,000 from a 401k, passing it along to dad for safekeeping and explaining it was merely to cover future basic living expenses because the bank might try to take a little bit doesn't fly.

I'd be worrying about this transaction longer than 1 year if I had done.

[backtoschool]

You will have to wait a year to file if you don't want the trustee to come after your father for that money.

I am not understanding why you did not just withdraw money out of your 401k in small amounts and take the penalty if you were that in need of meeting day to day expenses. The loan part is what I am not getting. Did you think you could bk on the 401k loan? You can't. That 401k loan is a secured loan, secured by your 401k and your salary.

At this point you should assume that the trustee will come after your father for at least the amount of the 25k that is left, and possibly for the entire 25k (actually most likely the trustee will come after your father for the entire amount of the 25k) My trustee went after my mother for two $500 checks that I wrote to my mother to help her with bills. That is why I am an asset case. My only asset is the $1,000 I gave to my mother.

If you are not in a position to wait a year to file, then I would figure out a payment arrangement to pay that money to the trustee. You are most likely going to be declared a 25k asset case.

[pcn]

We discussed a somewhat similar 401k withdrawal, and our atty made it clear that just the APPEARANCE of fraud (moving funds back and forth) is enough to get a bk dismissed, with the added penalty of making any debts in the bk non-dischargeable FOREVER. I would listen to your atty very carefully here.

[music12]

do absolutely nothing without your lawyer telling you to! you will for sure make it worse. your post basically says in so many words that you acted to hide money from creditors. that's precisely the definition of fraud in the bk code. you have to wait as long as humanly possible before filing.

and seriously, do nothing without your lawyer. just the fact that you didn't know that the 401k is exempt from creditors shows you are too clueless. i don't intend to be mean, but you need to realize that you are way too under-informed to make the right legal decisions here. almost everybody knows that retirement accounts are exempt.

[ToughSpot]

Thank you all for the advice. I know you are true friends as non of you a holding any punches ;-).

I knew that the401k was exempt. I already had a small loan and the plan only allows 2 loans at a time so I couldn't just take smaller amounts as I needed them. That's why I took the larger amount so it would last 5 or 6 months.

I guess what I don't understand is how giving someone $ and then getting the same $ back (all prior to filing) violates anything other than common sense. Especially since the time between the two transactions is less than a couple months. I was current on all my bills during that time so it's not like anyone lost the opportunity to get at the funds.

Thanks,
TS

[MSbklawyer]

That's definitely tricky. But if you father gives you all this money back and you can document that, say with a canceled check, wouldn't that negate the earlier fraudulent conveyance?

[justbroke]

I guess what I don't understand is how giving someone $ and then getting the same $ back (all prior to filing) violates anything other than common sense.

I can understand it, but what happens is that it sends a flag to the Trustee to "dig" deeper. Perhaps there's nothing to find, but being subjected to even more scrutiny is never a good thing. Worse case would be that the Trustee still seeks to ask your Father for the $25K. Unless you loaned it to your Father, and he paid you back, I think you have an issue. The Trustee will say that you gave your father $25K, then your father loaned you $25K. Your father is an unsecured creditor, so he won't get the $25K back. Worse still, the Trustee then seeks to avoid the transfer of the original $25K... suing your father for $25K. Of course that's the worse case, but that is what's sitting in the back of my mind on this. I have read similar cases where the Debtor actually ended up paying for the money, twice.

That's definitely tricky. But if you father gives you all this money back and you can document that, say with a canceled check, wouldn't that negate the earlier fraudulent conveyance?

I don't even care to speculate. In the end, I think it's how hungry the Trustee is to dig deeper and, perhaps, still pursue the transfer.

[AngelinaCatHub]

The Op borrowed his own monies. Many here state to use up extra monies on exempt stuff as food and utilities and even pay rent in advance. He pulled his own money out of exempt funds, and if recovered completely, is putting it back where his own money came from. I cannot see fraud here except for fraudulent ignorance of the facts, but not fraudulent intent. It came from his funds, not a creditors funds to be used for exempt purposes (his mortgage) and could be explained as a mistake and put back into his exempt 401. I think he could slide through this one. 'Hub

[justbroke]

I think he could slide through this one.

I hope that the OP can. You know, I'm a worse-case scenario kinda guy. I always hope for the best, but plan for the worse.

[AngelinaCatHub]

I hope that the OP can. You know, I'm a worse-case scenario kinda guy. I always hope for the best, but plan for the worse.

Yes, this is the safest way. However, if the OP cannot stand to wait a year or more, an explanation as has been put on the Ops first post should be understood. As long as there was no intent, (a hard thing to prove until the crime occurs) he never borrowed money from a creditor. Technically the 401K belongs to the Op and is exempt. So is the mortgage payments if that is all the money was spent on. Then the money left or even more than the original is still going back into an exempt item, retirement funds. 'Hub