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socrateaser, Attorney
Category: Bankruptcy Law
Satisfied Customers: 39174
Experience:  Attorney and Real Estate Broker -- Retired (mostly)
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Am I allowed to repay a loan to my profit sharing retirement

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Am I allowed to repay a loan to my profit sharing retirement plan right before bankruptcy?

I am the sole employee of a California C Corporation and its sole owner. The company has a profit sharing plan of which I am the administrator and only participant. I borrowed $50,000 from the plan. I owe $250,000 in credit card debt. I have income of about $2,000 per month and I have $50,000 cash. I also own some inventory and rental houses which should be covered by exemptions in Chapter 7, but my question is about the cash. If I repay the profit sharing plan, then file Chapter 7 bankruptcy, will the trustee view this as improper or be able to seize the cash?
If you were to repay the 401(k) loan immediately prior to bankruptcy, the trustee could claim that it was a fraudulent transfer or preference, intended to defraud, hinder or delay a creditor claim. On the other hand, if you do not repay the loan, the court will deem the money as a distribution, rather than a loan, since you are actually borrowing the money from yourself, and the distribution assets will be available to pay creditor claims.

So, you don't really have much choice other than to repay the loan. Waiting at least 90 days would take it out of the preference category, but the trustee could still sue you and the transferee corporation for the allegedly fraudulent transfer.

Hope this helps.

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