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Terry L.
Terry L., Attorney
Category: Bankruptcy Law
Satisfied Customers: 2602
Experience:  Better Business Bureau. 18yrs bankruptcy experience. Chicago Bar Assoc. American Bankruptcy Institute member.
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I am mid way through my 60 month Ch 13. If I cash in my 401K

Customer Question

I am mid way through my 60 month Ch 13. If I cash in my 401K to purchase a home cash, and then sell my primary residence, I know that the bankruptcy court will expect the proceeds of my current residence be applied to the case. My question is, 1) will they treat the proceeds of selling the 401K as income?, and 2) will they expect me to pay the same amount through the remainder of the case, not deducting the portion of my monthly Ch 13 payment that covers the mortgage?
Submitted: 7 months ago.
Category: Bankruptcy Law
Expert:  DrakeLAW replied 7 months ago.
Hello and welcome to JustAnswer, my name is ***** ***** I am an attorney. Please note:This is general information for educational purposes only and is not legal advice. No specific course of action is proposed herein, and no attorney-client relationship or privilege is formed by speaking to an expert on this site. This question and response may be viewed by other parties as noted in JA’s terms of service. By continuing, you confirm that you understand and agree to these terms. By continuing, you confirm that you understand and agree to these terms.1) no the proceeds from a 401(k) will not be treated as income as that money was already earned in the past and is merely sitting in a retirement account. But (2) do you pay your mortgage through your plan? If you do, then yes, I could see the trustee filing a motion to modify your plan and account for the fact that you no longer have a mortgage payment.
Customer: replied 7 months ago.
Would they modify my plan to reduce it by the amount of my mortgage? Or would they expect the same payment figuring that the other creditors would receive what was to go to the mortgage company? Also, wouldn't my tax return show the 401K proceeds as income?
Expert:  DrakeLAW replied 7 months ago.
Right, they would want the same payment and would want to pay what you were paying for the mortgage to go to your other creditors. However, it would be a complete redo of your income and expenses, so if any of that has changed (ie: expenses went up) you would get the benefit of that. But I need to understand something, do you currently pay your mortgage through your plan? Right, you pay tax on the 401(k) withdrawal because it was not previously taxed, however it is not considered income for the purposes of the bankruptcy analysis. It is an exempt asset.

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