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  • Bankruptcy
  • Clint W. Smith, P.C.
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  • May 23, 2013


Bankruptcy Withdrawal

I recently had a client come to my office, who had a very large tax bill, federal income tax. He didn’t make a lot of money so it didn’t make sense to me why there would be a large tax bill. As I investigated and discussed the matter with my client I learned that in his efforts to preserve his business and to keep his payroll intact and to try to stay afloat through this bad economy he had taken money out of his retirement account out of his 401 K; then invested it into his business which then ultimately failed anyway. Well when you do that; it is a taxable event that money you take out of your 401 K now becomes income and to this person it was well over one hundred thousand dollars, and the income tax on that had 35% or so, was a pretty large number. That bill could not be discharged in the bankruptcy. Yet there is a way to discharge income taxes and it is that you have to wait at least three years after the tax return is due; but that is a long ways away, and if you only did this recently your going to be waiting awhile before you can file bankruptcy and be able to take care of those taxes. Whereas the underlying obligations and debts that were in the business could have been discharged and started over, I have lots of people who start their business back over pretty quickly after a bankruptcy in fact even the day after filing, sometimes that is possible. So my purpose in this segment, is to give you a heads up, if you are thinking about that think really hard or talk to your accountant, make sure it makes sense. We really don’t know if we are out of the woods yet on this economy, out of this recession and so to take money out of your retirement in large amounts hoping that things will turn better is a pretty risky proposition. So I would seek professional council on that and it does make sense to talk not only to a CPA but a qualified bankruptcy or workout counsel; because those are major decisions that can impact a persons life

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