401K and Increasing Retirement Before Filing

visiting my 401k losses

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The Question

Some debtors have been asking on bankruptcy forum websites whether of not they should place extra money they currently have into a 401K account for their retirement before they file for bankruptcy. Is that a good idea?

The Problem

A bankruptcy court trustee can go back up to a year before you file a bankruptcy in order to investigate whether or not you have showed preference in paying any debts, hidden any assets, or for any expected fraudulent activity. So, a potential problem for you filing bankruptcy and trying to save money in a 401K can be scrutinized by the bankruptcy court trustee in a negative light.

Possible Repercussions

If you owe a very close relative you want to pay off before you file bankruptcy and the trustee finds out about the payoff, the trustee can take back the amount of the payoff and return the money back to the bankruptcy estate to be paid to your creditors in an priority order. The same thing can happen if you pay more to a certain creditor within a year of filing bankruptcy.

If you try to hide assets by selling them to a friend or family member at a low price in order to buy them back in the future, the trustee can not only take the assets back, he can have the bankruptcy dismissed, and/or have you charged with fraud if he thinks it to be an attempt to defraud the bankruptcy process.

In the case of just increasing your 401K for retirement before you file bankruptcy, trustees in the past have viewed the increase in a variety of ways.

Possible Benefits

Some trustees will seize the money which has increased the 401K and place the money back into the bankruptcy estate. Others have allowed you to keep a portion or all of the 401K increase in order to gain a small savings by the end of a bankruptcy.

Very few trustees have historically seen the increase as any type of fraud, but if you are considering filing bankruptcy, it is best to check with a bankruptcy lawyer who is experienced with the trustees in your Bankruptcy Court District. They can tell you how the trustee might react to finding out you have increased your 401K just prior to filing bankruptcy.

If a trustee is known only to check as far back as only three months, a bankruptcy attorney might recommend you increasing your 401K to make a savings for you in the future.

A Warning

The same attorney will most likely tell you that after reaping the increase of the 401k and taking the money out early when the bankruptcy closes, the bankruptcy trustee could reopen the case if he finds out about the early withdrawal. Then, he might seize the money and/or file fraud against you for fraudulent intent.

The Chance to Start Over

If you find such a cooperative bankruptcy lawyer and trustee that allows an increase, count your blessings for your windfall, but do not test the fortunate situation you find yourself. Many trustees are kind and want to see you make it in the future. That is why many are not so hard on you for increasing you 401K. After all , it is your future retirement , and bankruptcy is all about starting over and being able to help you take care of yourself in the future. Retirement 401K accounts exist for the same purpose.

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