What will happen if the 401,000 lump sum in bankruptcy has been cashed out and spent? 9 Answers as of February 10, 2012

Once it is out of the 401k, it is no longer an exempt asset.

A 401k is exempt and should be protected even if received in bankruptcy. Once you cash it out, you have turned an exempt asset into an non-exempt asset. You also could have an issue of good faith depending on the distribution and circumstances.

A motion should be made by your counsel to restore/disgorge the monies which are exempt in Bankruptcy.

The money is exempt while in a 401(k). Once the money is cashed out, it is technically income and I believe most courts would consider it income of the estate.

If you spent $401,000 from a 401K without discussing it with a lawyer, you may be headed to prison or at least disaster. See a lawyer. Hope that you are not too late.

You certainly are going to have to explain how you spend that huge amount of money and have a reasonable explanation. If taken out of the 401k then it loses the exemption that you would otherwise be entitled to protect the money. You certainly need to consult with a bankruptcy attorney and be represented in the case if the attorney thinks you should file a bankruptcy case.

QDRO funds are exempt if they were ERISA qualified funds before they were rolled over into the QDRO. If they were not they were/are property of the estate and should have been listed on Schedule B If they were ERISA funds rolled over into a QDRO and you spent the money.... (a) you may have a significant tax problem if you were not over 59.5 years old; (b) What you spent the money on should not be a problem, especially if you spent it post confirmation; and (c) I hope you spent it wisely.

Normally the 401(k) would be exempt, however if it was distributed and spent, it would not be exempt. Generally the trustee will want to know what it was spent and when. Depending on your court's policy, it may also make you have too high of income to file a Ch 7 if you spent it within the last 6 months. Some courts will let you do a special affidavit saying it was a onetime thing and shouldn't be counted towards the means test, some courts will not. I always make my clients give me a list, down to the nearest $100, of what they spent it on so that we are ready when the trustee asks, or I can say hey we better hold off from filing for a while, you have some preferential transfers here.

The 401k would remain exempt since it was transferred via a QDRO. However, in order to spend it, you need to file a motion to abandon the 401k with the court. The motion will be granted so there is no fear about not being able to use the funds. After which, you can use and spend the money as you see fit.