Expert: Mark J. Markus- California Bankruptcy Attorney - 11/30/2008

Question
Hi, I have a 30K outstanding 401K loan, 66K in credit cards, 10K on a car loan (with only 1K in equity).  I expect to get laid off and will receive about 38K in a severance package. I also have about 22K in savings. If I paid my 30K 401K loan off (to avoid the early distribution penalty & tax) and continued to live for 6 or 7 months on my savings, I would still have about 15K in cash but I think I would qualify for chapter 7 (assuming I couldn't find another job during this time) since I have few assets (just household furniture and clothes).  My question is, would my 30K 401K loan repayment be considered a "fraudulent transfer" if I paid it with severance cash just 7 months prior to filing chapter 7?  I hope to find another job quickly and not go down this road but if paying the 401K loan will ultimately get my chapter 7 case thrown out, maybe I should just pay the early penalty/tax to the IRS and not try to protect those funds.  I got into this debt because of a gambling problem (which I've since stopped).  Any advice would be appreciated.  Thanks

Answer
Sorry I took so long to respond, but I actually had to think about this one for a bit.  The best answer I can give you is that it is probably not a fraudulent transfer to repay your 401k loan.  It's also not a preferential transfer.  The only issue I can think of is that you would be shifting $30,000 from a non-exempt to an exempt asset, which some Judges might consider inappropriate, but I disagree.  So I think you should be OK the way you describe handling this.  Just make sure you keep track of all the payments and disclose them as apprpriate if and when you file.