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A.J.
A.J., Attorney
Category: Bankruptcy Law
Satisfied Customers: 4300
Experience:  Experienced consumer bankruptcy attorney.
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i have over $130,000 in credit card debt and my house has about

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i have over $130,000 in credit card debt and my house has about 125,000 in equity. If I file bankruptcy then they will probably take my house. I also have a 401 k that has over 325,000 in it. In order to save my house and prevent myself and family from going bankrupt can i pull money out of my 401 k to pay off my debt as a hardship case?

SavyLawyer :

Hello, and thank you for using Just Answer. My name isXXXXX am a bankruptcy law professional, and I look forward to answering your question this afternoon. Give me just a moment to review your question.

SavyLawyer :

Depending on the terms of your 401(k), you can generally pull money out early, but must keep in mind (1) that there will likely be a tax penalty and (2) that while the money is still in a 401(k) it is usually protected were you to file for bankruptcy. Consequently, a better alternative may be to look at a chapter 13 bankruptcy repayment plan. Often, debts can be lowered considerably and the repayment rate set at sometime affordable to the individual, and protects equity in a home at the same time.

Customer:

So if i pulled money out early it will not qualify as a hardship?

Customer:

I also thought they would come after my house in a repayment plan.

SavyLawyer :

That would depend on the terms of the 401(k) plan itself, generally the plan sets the terms for a hardship distribution. It is important to keep in mind that once a hardship distribution has been made, a contribution back in to the plan generally cannot be made for at least 6 months.

SavyLawyer :

As for a chapter 13 repayment plan, generally no, the point is to have the debts paid down instead of liquidating assets to repay creditors. That is one of the primary differences between a chapter 7 and a chapter 13, under a chapter 13 payments are being made and assets are generally protected.

Customer:

Actually i made a mistake this is an IRA i'm talking about. When I was laid off 2-years ago from my job i rolled it over to an IRA. Where can i find the laws regarding IRA distribution?

SavyLawyer :

In many ways chapter 13 was designed to help people pay down debt while still protected assets that they have. No system is perfect, but generally under a chapter 13 plan major assets such as a home are car are not at risk.

SavyLawyer :

The Internal Revenue Service (IRS) has a pretty good FAQ on distributions from an IRA at:

SavyLawyer :

http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-IRAs-Distributions-%28Withdrawals%29

Customer:

Do things change since we are talking about an IRA vs an 401k

Customer:

Okay, I think I understand. Thanks for your help.

SavyLawyer :

Possibly, generally hardship distributions are not an issue for an IRA, the person holding the IRA can make a withdrawal, although tax penalties are more likely to be an issue.

SavyLawyer :

You are welcome, it has been a pleasure chatting with you. If you do not have any further questions, please remember to RATE my answer so that I can receive credit for my work. Also, before making any decisions I would strongly encourage you to sit down with a bankruptcy attorney in your area of California, so that at the very least you have a thorough understanding of the pros and cons of a chapter 13 bankruptcy (I believe that a chapter 13 may be a good option for you, but it is important to sit down and talk with an attorney licensed in your state in person before making any decisions).

SavyLawyer :

Let me know if you need any additional information. Otherwise, please remember to RATE my answer so that I can receive credit for my work.

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