Can You Sell Property Before You File For Bankruptcy?
If you are thinking of filing for bankruptcy, you probably think you’re going to lose a lot of your assets. That thinking is, for most people, and in most cases, false. Still, the fear of that happening drives a lot of people to want to sell off their things, as quickly as possible, before filing for bankruptcy.
Selling Things Isn’t Always Problematic
It isn’t always problematic to sell asset you own before a bankruptcy, as long as you’re not doing it specifically to evade creditors. There are right and wrong ways to sell property before you file for bankruptcy.
Before you start selling everything you own, do you know that the things you’re selling will even be lost in bankruptcy? In many cases, the assets that you are selling may be exempt. You may not lose them anyway in the bankruptcy.
In the event you do sell what would be exempt property before you file for bankruptcy, you are, in most cases, not doing anything wrong because the trustee could never get the exempt property anyway.
Selling Non-Exempt Property
Generally, you can sell property that you own before you file, so long as you use the money to pay for necessities, such as rent, mortgage, food, gas, or utilities if you have no other way to pay for these items.
This makes sense — if you sold property and just banked the money, the money could be taken by the trustee as easily as the property you just sold could have been taken.
There are times when selling things before bankruptcy can get you in trouble, or when it can jeopardize your bankruptcy discharge.
Rules for Selling Property
You should always sell an asset fair market value for whatever you are selling. If you sell your boat for $100 to your best buddy, you will be setting off alarm bells that the sale is a fraud and just done to avoid losing the asset in the bankruptcy. Additionally, the trustee could even sue your buddy, to get the boat back, thus dragging friends or family into a lawsuit that they never wanted to be involved with.
The court will see who you sold your property to; selling property to friends or family doesn’t automatically mean the sale is fraudulent, but it will raise the trustee’s curiosity.
The court will also look at time—the farther before your filing the sale of property is, the more likely it will be that the sale will be OK, and won’t hurt your chances of getting your discharge.
Sometimes, people sell non-exempt property, to protect the money in exempt property. For example, if you sell your boat and use the proceeds to pay down your mortgage on your otherwise exempt homestead. Here, you can run into legal problems, even though your home is normally exempt.