457b Plans and Insolvency Filing

[Guest blc]

I am unfortunately having to short sale our home. Under the Debt Forgiveness Act, the total difference of the principle vs sale amounts cannot be forgiven because a refi was done and the mortgage balance does not represent the sole cost of the home or improvements. The amount in question is approximately $90K. Filing for Insolvency to defer the difference not covered under the Act is an option. Without knowing how 457bs are considered in these cases, we would otherwise clearly meet the criteria for Insolvency, however I cannot find IRS ruling if 457b funds are considered assets in these cases. IRS's own Insolvency work sheet only asks for "interest amounts". I know these funds are normally protected. I have access to these funds w/o penalty but would still have the tax liability. Is there any resource or first hand experience with this matter. I am trying to avoid BK if possible. Any help would be greatly appreciated. Thank You,

[mbozek]

I am unfortunately having to short sale our home. Under the Debt Forgiveness Act, the total difference of the principle vs sale amounts cannot be forgiven because a refi was done and the mortgage balance does not represent the sole cost of the home or improvements. The amount in question is approximately $90K. Filing for Insolvency to defer the difference not covered under the Act is an option. Without knowing how 457bs are considered in these cases, we would otherwise clearly meet the criteria for Insolvency, however I cannot find IRS ruling if 457b funds are considered assets in these cases. IRS's own Insolvency work sheet only asks for "interest amounts". I know these funds are normally protected. I have access to these funds w/o penalty but would still have the tax liability. Is there any resource or first hand experience with this matter. I am trying to avoid BK if possible. Any help would be greatly appreciated. Thank You,

What type of insolvency are you filing under?

If you are filing under the federal bankruptcy act, all 457 plan assets are exempt from the claims of your creditors.

If you are filing under state law there are two different answers.

If you participate in a state 457b plan creditors claims will be rejected because the assets must be held for the exclusive benefit of particpants.

If you participate in a non profit 457b plan the assets may be subject to creditors- its a grey area subject to state law. For example, Texas prohibits wages (including non qualified benefits) from being seized by creditors. Also the plan may prohibit it. You need to check with counsel.