401K and selling stock as income for CMI
Since October 17, 2005 Congress has set up a new way to determine if someone qualifies for a Chapter 7. They now look at income from the last 6 months. This has become an issue lately. Many Debtors are cashing in stocks or 401K to get money to survive on during that 6 months before they finally file bankruptcy. This is causing many Debtors to then not qualify for a Chapter 7 for another 6 months.
I attended a 341 hearing yesterday with a Debtor in a similar situation. She had gotten a divorce, and part of the divorce settlement was half of her husband’s 401K. She would cash in various amounts at a time so she could pay all her bills. In 2006 she cashed in a little over $50,000. The US Trustee is now requesting information on when she cashed in the 401K. She said that she would have to pull bank records, but that she knows a large sum of it was cashed within the 6 months before filing bankruptcy. Luckily, she had very little other income and has room for about $30,000 before she is even above median income. However, it is one more thing attorneys need to look at closely before they file the case. If she had cashed the full amount in within the 6 month period there is a good chance she would no longer qualify for a Chapter 7 and would have to convert to a Chapter 13.
Clients need to be told that cashing in stock before they file is considered income for the purpose of calculating their 6 months income. It is important to note though, that if the stock is non-exempt they will have to cash in the stock and turn over the money to the trustee anyway. It might be better to cash in the stock and try and wait 6 months depending on the circumstances. Each client’s situation is different, and the Debtor needs to be given all the information to help him or her make an informed decision on what is best for a particular situation.
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