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Elizabeth Prentice
Elizabeth Prentice, Attorney
Category: Bankruptcy Law
Satisfied Customers: 174
Experience:  Managing Attorney for one of the largest consumer bankruptcy firms in America.
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If a debtor who is filing a chapter 7 BK who has taken a withdrawal

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If a debtor who is filing a chapter 7 BK who has taken a withdrawal from his 401k in the amount of $19,000.
He is utilizing the money to pay attorney fees of $1,500, $12,500 for a rental property with an option to buy. He will not own the home at the time of filing the BK. $2500 will go to taxes and penalties. $500 for vehicle repairs and the balance of approximately $2,000 will go to daily living expenses. By the time the BK is filed he will have 0 cash on hand.

My question is will the Trustee have any issues with this?
I am a bankruptcy attorney and I would be happy to assist you. Although you have withdrawn money, based on your statements you have used it for necessary living expenses. Additionally, typically your 401k is a protected asset. The only issue of concern is the rental property. However, the trustee is able to avoid certain payments (over $600 cumulative) made to creditors within the 90 days prior to your filing bankruptcy. Typically the trustee can not avoid payments made to secured creditors, since the creditor would be entitled the money based on the security of the loan. Therefore, if your payment was made towards a mortgage it not avoidable. However, if the money paid to the rental property is not for your primary residence or was merely made for back rental payments on a contract, the trustee may have the ability (depending on the terms of the rental agreement) to take back the payment from the rental property. The rest of the items you paid for should be fine.

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Customer: replied 4 years ago.

Could you explain "not avoid payments" The $12,500 is for a primary residence. He is paying $12,500 towards the purchase price of the home. He will be renting with the option to buy

A trustee is able to "avoid" certain payments made by a debtor, within the 90 days prior to filing bankruptcy per Section 544(a). Even with an option to purchase, the payment made was merely rent under the law. Therefore, without the debtor having further security, the trustee will assess the payment and the option contract in great detail before assessing whether he is able to avoid the $12,000 payment. The trustee has the ability to terminate the contract in bankruptcy, if he finds that he believes it to be unreasonable. The contract will need to be assumed in the bankruptcy case in order to remain valid, and in rare instances the trustee and/or the judge can choose to not permit the debtor to assume it (aka keep it). The best scenario would be for the debtor to not take out the $12,000 from the 401k or make the payment prior to the bankruptcy. Since the 401k is exempt, the debtor could take out the money after filing bankruptcy and then enter into the option/purchase agreement. If that is not possible, then make sure to inform the debtor that the trustee may decide to prevent the assumption of the option contract/lease and may also attempt to avoid the $12,000.00. This will be up to the individual trustee assigned to the case and his interpretation of the contract, as well as his assessment of the entire estate.

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