by Victoria Ring, 713Training.Com
July 30, 2007
Because most debtors do not think about a 401K being an asset, they will normally only record the deduction for the 401K on their Income Page.
As soon as you discover there is a 401K deduction being deducted from a debtor’s paycheck, you need to find out the following:
1. Is there a loan against the 401K? You will find that many debtors will get a loan on their 401K before filing bankruptcy so always make it a habit to look for this.
If there is a loan against the 401K, be sure to separate the payments for the loan and the payment into the actual 401K savings. You will find the debtors either cashed in the entire 401K and they are only making payments on the loan, or they are still paying into the 401K Plan as well as paying back a loan. In this scenario, the 401K is listed on Schedule B with a lienholder attached to it.
2. What is the market value of the 401K? Every debtor should know this information because they periodically receive a statement from their employer telling them the value of their 401K Plan. If the debtor does not know the amount, they will need to contact their employer and obtain the value because it is very important.
Tip: Sometimes you can determine an approximate market value of the 401K by asking the debtor: (1) How long have you participated in the 401K? and (2) What is the total amount of the deduction? Therefore, if you find out a debtor has been participating in a 401K Plan for 15 months and they pay $250 per month, the market value will be approximately $3,750. However, it is best to always get the actual amount provided on the statement from the employer if you can.
However, in circumstances where the debtor makes it impossible to obtain this information, do not argue with them. Instead, use the calculation above and make a note on the Attorney Cover Sheet that states something like:
The market value of the 401K is estimated by calculating the length of time in the 401K Plan and the normal monthly payments. This was done in lieu of obtaining documentation that the debtor was unable (or unwilling) to provide. You may need to require debtor to obtain actual figure from employer before filing petition.
In summary, a 401K is listed on Schedule B as an asset and Schedule I as a deduction from the debtor’s earnings. It doesn’t matter if the 401K is worth $1.00 or $1,000,000.00. A 401K is an asset and Schedule B should include all assets the debtors have an interest in.
————————————–
Disclosure: The information contained in this article is solely intended to increase the skills of paralegals and other legal staff who are employed virtually or non-virtually by bankruptcy attorneys. This information is not to be used by non-attorneys to prepare bankruptcy petitions for the general public. The information is solely intended to train legal professionals working under the direction of licensed bankruptcy attorneys.
————————————–
AUTHOR BIO:
Victoria Ring is a Certified Paralegal and Bankruptcy Specialist and was the first paralegal to develop the Virtual Bankruptcy Assistant field in 1999. She has also developed an entire line of training products and holds several seminars per year in drafting bankruptcy petitions. Her training materials have been approved by NALS, NFPA and the Supreme Court of Ohio for CLE credits. Additionally, Victoria Ring provides speaking and in-house training services for bankruptcy law firms. Visit her website at http://www.713training.com
