Can our mortgagee’s legally take my 401K distribution to cover any amounts owed to them due to foreclosure?

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Can our mortgagee’s legally take my 401K distribution to cover any amounts owed to them due to foreclosure?

My bankruptcy finalized in 10/10. My husband then lost his job and our house is upside down, so we are walking away. Refinancing and renegotiating won’t help;we owe too much and make too little. Taking 401K distribution to purchase another main residence (yes, I know about all the penalties but can’t even afford rent right now). We are worried that the first 1st and 2nd mortgage holders could get their hands on the money from our bank before we even purchase something else. The sheriff’s sale is next month.

Asked on April 16, 2011 under Bankruptcy Law, Minnesota

Answers:

SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 9 years ago | Contributor

You are right to worry. While the money should be safe while actually in your 401k account(s), once it is distributed, creditors can--with the proper court order--reach it. Thus, if you put the money into your bank account prior to the purchase, creditors who become aware of the transaction could look to garnish your bank account, thereby getting the money. Also, while a creditor could not foreclose on a new home, they could certainly put a lien on it, which would encumber title and prevent you from subsequently selling the home until and unless you satisfied the lien. You may wish to reconsider renting, even if you rent a much-more-modest apartment or home than you would otherwise have wished.


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