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Phillips Esq.
Phillips Esq., Attorney-at-Law
Category: Bankruptcy Law
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Experience:  B.A.; M.B.A.; J.D.
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Can you please explain the ramifications of taking a loan from

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Can you please explain the ramifications of taking a loan from a 401-K account before filing bankruptcy? My husband and I paid our lawyer the fee already but have not gone ahead with the filing as of yet, and for various reasons we could really use that loan right now.
For instance: we need some furniture, ours is rented, but we'd like to know how this would affect us. Thank you.
Thank you for giving me the opportunity to assist you. Kindly use CONTINUE or REPLY button to ask for clarification or follow-up questions.


Could you explain a little more?

When would the loan be taken?

What is the anticipted date of filing for bankruptcy protection?
Customer: replied 3 years ago.


Hello,


 


The loan would be taken immediately, we have a pre-approved amount already and if we applied today I believe it would be direct deposited in 3-5 days.


We are unsure of the anticipated filing date...we paid the fee about a year ago but we couldn't pass the Means test for Chapter 7 so we were going to do Chapter 13, yet our lawyer has been waiting because she thinks with our debt (which includes losing our home to foreclosure-although we tried very hard not to, because it was a manufactured home no-one would work with us-so we owe $90,000 on that alone.)


 


Also there are other bills not included in our expenses, such as our student loan payments which are in deferment but we need to start paying on soon, we also have 3 extra people living with us for free, two are our children, ages 18 and 22, and another is a 19-yr-old.


 


My husband needs to send our attorney some updated paystubs, etc. We are in a weird situation because he's been working overtime to help make ends meet and yet our income is still too high.


 


I hope I've answered your questions. Thank you.

Customer: replied 3 years ago.


Hi,


How soon can I expect my answer??


 


Thank you.

Hello: I am sorry for the delay in getting back to you. I was offline when you responded to information requestion.


The loan would be taken immediately, we have a pre-approved amount already and if we applied today I believe it would be direct deposited in 3-5 days.

We are unsure of the anticipated filing date...we paid the fee about a year ago but we couldn't pass the Means test for Chapter 7 so we were going to do Chapter 13, yet our lawyer has been waiting because she thinks with our debt (which includes losing our home to foreclosure-although we tried very hard not to, because it was a manufactured home no-one would work with us-so we owe $90,000 on that alone.)

Also there are other bills not included in our expenses, such as our student loan payments which are in deferment but we need to start paying on soon, we also have 3 extra people living with us for free, two are our children, ages 18 and 22, and another is a 19-yr-old.

My husband needs to send our attorney some updated paystubs, etc. We are in a weird situation because he's been working overtime to help make ends meet and yet our income is still too high.



Your Question: Can you please explain the ramifications of taking a loan from a 401-K account before filing bankruptcy? My husband and I paid our lawyer the fee already but have not gone ahead with the filing as of yet, and for various reasons we could really use that loan right now.
For instance: we need some furniture, ours is rented, but we'd like to know how this would affect us. Thank you.



Response
: DO NOT take out this loan BEFORE the filing of bankruptcy protection. Once you take the money out of 401-k, which is an exempt asset and put it in your bank account, the withdrawn fund ("asset") loses its protection. You must then exempt the asset in your bank account and if you are unable to exempt it, then the fund become property of the bankruptcy estate. PLEASE DO NOT DO IT. WAIT AFTER YOU FILE BEFORE TAKING ANY MONEY OUT OF YOUR 401-K


Let me know if you need further clarification.

Customer: replied 3 years ago.


Hi,


 


I'm so sorry to have to write again...I really appreciate your help so far but just a couple more things:


How would we have to make it "exempt" in our bank account? Would it matter what it was spent on?


 


And what if we waited to file for a period of time...as we aren't even sure when this will be filed, it's been taking so long. I'm so stressed about money right now I just want to take a loan and then wait to file, because we've already waited so long and there is still no information on what we even might qualify to do so.


 


So basically, although I do understand that you said it was not a good idea, in light of not knowing when we'll be able to file can you let me know if that changes things? I appreciate your help so much. Thank you.

There is no need for an apology. I am here to assist. If you have further questions after reviewing my answers here, do not hesitate to contact me.


Your follow-up questions:


Hi,

I'm so sorry to have to write again...I really appreciate your help so far but just a couple more things:

How would we have to make it "exempt" in our bank account? Would it matter what it was spent on?



Response 1: If the money remains in your bank account on the day you file for bankruptcy protection, you must use the exemption available for you under your State's exemption scheme to exempt the funds. For Maine, you have to use the "Wild Card Exemption" to exempt funds in your bank account. Currently, this exemption is only $6,400.00. So, for instance, if have more than $6,400.00 in your account on the date of filing, you would have turn over the excess to the bankruptcy Trustee. For Maine Exemptions, click on the link below:


http://www.legalconsumer.com/bankruptcy/bankruptcy-law.php?ST=ME#exemptions




It does not matter what you spent on so long you do not spend it on luxury items such as faux coats or jewelries. You also have to wait to file for bankruptcy protection 90 days after you spent the money to avoid any preference issues. For instance, the bankruptcy Trustee may object to payments to creditors within 90 days of the bankruptcy filing; the Trustee would object to payments made to insiders /family members within one year of bankruptcy filing. So, be careful NOT to pay back loans from family members. See 11 U.S. C. Section 547:


http://doney.net/bkcode/11usc0547.htm


And what if we waited to file for a period of time...as we aren't even sure when this will be filed, it's been taking so long. I'm so stressed about money right now I just want to take a loan and then wait to file, because we've already waited so long and there is still no information on what we even might qualify to do so.

So basically, although I do understand that you said it was not a good idea, in light of not knowing when we'll be able to file can you let me know if that changes things? I appreciate your help so much. Thank you.



Response 2: Yes, it changes things. See my previous response above.

Customer: replied 3 years ago.


Just so you know, you will get an "excellent" rating from us!...I think I understand... but am I to assume that things such as:


 


Lasik Eye Surgery,


Cosmetic Surgery (I've had four kids and would like to get a little lift,- possible breast lift, and maybe some ab work though a tummy tuck is probably too much unless I go to Mexico!-- but it really is something I'd like to pursue as much as I can )


Nail Tech Course ($2000)


Bringing my car to the shop because the "service" light is on, etc. and any expenses that will incur, etc.


 


Are those "luxury" expenses? And what if we use our loan for those and wait more than 90 days?


 


Also, we do owe some family money, can't we just pay that back without saying anything about it if we wait the required amount of time?


 


Thanks so much again.


Just so you know, you will get an "excellent" rating from us!...I think I understand...

Response 1: I appreciate that.

but am I to assume that things such as:

Lasik Eye Surgery,

Cosmetic Surgery (I've had four kids and would like to get a little lift,- possible breast lift, and maybe some ab work though a tummy tuck is probably too much unless I go to Mexico!-- but it really is something I'd like to pursue as much as I can )

Nail Tech Course ($2000)

Bringing my car to the shop because the "service" light is on, etc. and any expenses that will incur, etc.

Are those "luxury" expenses? And what if we use our loan for those and wait more than 90 days?

Response 2: Those expenses are alright. Just make sure that you wait to file at least 91 days after paying for those expenses.

Also, we do owe some family money, can't we just pay that back without saying anything about it if we wait the required amount of time?

Response 3: This is a “NO NO.” You cannot do this. You would get yourself in trouble with the Trustee if the information is revealed during your examination and careful review of your assets and liabilities. Also, U.S. Trustee's Office conducts random audits. If you are audited and it is discovered that you lied about your liabilities and those paid, not only can you not receive the discharge of your debts, you could be facing some stiff penalties including jail time—bankruptcy fraud carries a sentence of up to five years in prison, or a fine of up to $250,000, or both. See 18 U.S.C. Sections 152 and 157:


http://www.law.cornell.edu/uscode/text/18/part-I/chapter-9

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