We have a client who is going through a bankruptcy proceeding for racking up massive amounts of credit card debt. In 2018, they took $100k out of their 401(k) to help pay for their living expenses, and their lawyer is claiming they are eligible for a waiver of the 10% penalty due to hardship cause by bankruptcy.
Our client and his wife make on average $130K per year over the last 4 years. They have a home, but their mortgage and real estate tax payments would probably be around $3,500 a month, well within what they take home after taxes, with plenty left over for a normal, responsible family to survive.
Based on the regulations, I don't believe they qualify for the 10% exemption, as they have regular income each month to cover the expenses that would qualify for the exemption. The lawyer is insisting the hardship caused by the bankruptcy should qualify them for the waiver. Does anyone agree with the lawyer here?