Bankruptcy and withdrawing retirement funds early???

[sroutlaw]

What is the name of your state? Missouri
My SIL and BIL are both mentally ill. Both have recently lost jobs (one with the US govt, IRS, the other nursing). They are in Chp. 7 converted from Chp 13. After making MANY bad choices, they have now taken out his retirement funds (near 20K) right after filing BK. He is not retirement age, nor is she. Will their withdrawal (and they have nO intention of telling the trustee) be fraud if not reported? Or is it not touchable since it was a retirement account?
Really don't want to see them in worse trouble - but they are neither one too stable mentally and both have spent years in the blame game. They both intend to file for disability now as well....


Please advise on what if anything can happen now if they don't report the funds?

[AttorneyOney]

If the plans were part of the estate (e.g., they weren't ERISA qualified or exempt for some other reason), the trustee WILL find out about the withdrawal and your guys will be in trouble. They could lose their right to a discharge and even potentially face jail. The only way to avoid deeper trouble is to tell the trustee and say they didn't know any better.

OTOH, if the plans were outside the estate or exempt, they did nothing wrong by cashing them out and paying the penalties. In this case, the trustee will not care at all in a c. 7 case, since the proceeds are not part of the estate.

Either way you slice it, they should tell the trustee what they've done in the form of a simple letter. ("This letter will inform you that XXX, debtor in In re XXX, case no. 04-xxxxx-xxx, has taken the following action with regard to a certain retirement account identified as follows [blah, blah, blah]: withdrawn $xxx on [date].") No need to justify or apologize -- just state the bald facts.