I live in Colorado. I recently resigned from Federal service and I have two 401(k) loans (residential and general purpose) outstanding (unpaid). I plan to file for bankruptcy in 6 months when I meet the bankruptcy means test requirements. I realize that if I do not repay the two 401(k) loans within 90 days, the unpaid loan balances will be treated as a taxable distribution and I will have to come up with the money to pay the taxes at the end of the year. I realize my 401(k) monies are exempted under Chapter 7 bankruptcy. My question is if I immediately sell personal property to pay back the 401(k) loans before the 90 day expiration date, will those paid funds still be protected under bankruptcy and not counted towards my personal property exemptions? Response 1: Yes. Also, your payment would not fall under preference payment since you are paying back to yourself technically and not to a creditor. See 11 U.S.C. Section 547 Also, I have stopped making payments on unsecured credit cards. Is it possible or likely that a creditor could sue me and get a financial judgment and seize my bank accounts before I can qualify for bankruptcy and get asset protection from an automatic stay? Response 2: It is not likely. When you are delinquent, the creditor would first make phone calls and then transfer the debt to a collector usually after 6 months after attempting to collect from you with no success, it could be longer. The collector would make numerous attempts to scare you into paying. If the collector is not successful, usually the account is transferred to another collector to attempt to collect the debt. The creditor may at that time authorize the collector to file a lawsuit if the collector has not been successful into scaring you to pay. Also and more importantly, even if the creditor files a lawsuit, it would take more than six months for the creditor to obtain a Judgment against you IF YOU FILE RESPONSE TO THE COMPLAINT. After Judgment, the creditor would attempt once more to get you to pay and if you do not pay, the creditor would file Application for your Examination as to your ability to pay. You need to make sure to show up for this hearing. If you show up, you can continue the case for three or four months, another three of four months, etc., if you continue to show to creditor’s Attorney at the Courthouse that you just cannot afford to pay. However, if you do not show up, the Court would issue a capias on you—the Court would issue a warrant for your arrest to secure your attendance at next hearing on the case. If you do not show up again, the Court would then issue garnishment Orders at that time if the creditor knows about your employment, bank accounts, or other assets that are not exempt. So, there are so many steps to getting a Judgment and then a garnishment/levy that would give you the needed time to file for bankruptcy protection and prevent the creditor from reaching your assets. My last question is should I continue to make payments to secured loans (house, cars, etc.) in the 90 days before I file bankruptcy. I realize I will have to submit forms that show payments made to creditors 90 days before I file for bankruptcy. I am not sure if this shows favoritism to preferred creditors.
Response 3: if you want to keep the cars, house, etc, it is imperative that you continue to make the payments. Otherwise, the lender can foreclose on your house or repossess your cars. The payments to these secured creditors eventhough made during the 90-day preference period would not be subject to preference challenge by the Trustee because you are paying them to keep the house, to keep the car. The payments to these secured creditors would fall under preference exceptions. See 11 U.S.C. Section 547(c)
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