Expert: Terry Leeders - 9/16/2008

Question
I moved back to my homeown in Herrin, IL in October, 2007.  My FL house was on the market for a year and a half w/o any lookers.  Went into foreclosure in Feb, 2008.  House prices dropped by $200,000 in a short time in FL.  R.E. market a mess there.  I was out of work for a year and a half but was applying the whole time.  When I applied for food stamps here in IL, I was told I could cash in my 401K acct (about $25,000).  I wasn't aware I could access these funds.  I cashed in the acct. in March of 2008.  I lived off of these funds for several months until I got a job recently.  I also paid back my sister, brother & mother for funds they had loaned me for emergency living & moving expenses ($3,000 to brother, $1200 to sister & $500 to mother).  At the suggestion of a friend, I filed for a Chapter 7 bankruptcy in IL in June, 2008.  The bankruptcy trustee here in So. IL asked my bankruptcy atty. to research FL law - something about 2 years prior- & he had told me he found that FL law was based on the more liberal federal law regarding retirement funds.  Now the bankruptcy trustee is stating my relatives might have to repay those funds back into the court.  I relied on my attorney's adice & don't want to see my relatives penalized for loaning me funds during my time of desperation.  My sister, in paricular, doesn't have funds available to pay since she had borrowed from her credit card to give me funds & can't sell her FL house eiher.  Any advice will be appreciated.  Thank you.

Answer
unfortunately, by paying back family, the court can go back and undue the payments because they were preferential (you paid them, but not your debts I assume).  The trustee will then divide the proceeds between all unsecured creditors.  If you had left the funds in the 401k or just used the proceeds yourself for those expenses your family lent you, you would have been ok, but the trustee does have the power to go after those funds.  You may want to see if you can offer a buyout to the trustee, whereby you would pay the trustee yourself.