Things to Consider when Selling Assets before Filing Bankruptcy
Many debtors try to sell off at least some off their assets in order to have money to pay their creditors and to live but there are risks in selling off assets too. This is because assets are supposed to be used to pay off your creditors and not favor one creditor over another unreasonably.
Selling assets before Bankruptcy
The US Bankruptcy Trustee will examine transfers and sales that you made before you filed for bankruptcy. In some situations, the Trustee may try to seize those assets from the people who received them. The trustee may also penalize the debtor by refusing to accept a reorganization plan, disallowing some exemptions or even denying the debtor the right to discharge the debts.
There are many factors the Trustee will review. Here are some of those factors:
The value of the property sold
Sale of assets (home, cars, personal possessions and other assets) are more likely to be approved if the seller/debtor got fair market value for the sale. If the debtor got a reduced price or gave a discount, then the sale will likely be questioned. Debtors are often pressured to come up with money so they are tempted to make bad deals.
The Trustee will review the assets sold, determine the fair market price and compare that to that actual proceeds. While the Trustee is acting on behalf of the creditors, this can actually be a good thing for the debtor. If the Trustee is able to invalidate the sale and get the right price, then the creditors will get more money which helps the debtor meet his/her obligations.
Secured assets cannot be sold without the consent and approval of the creditor that has the security home. For homes, the mortgage holders have security interests. A seller cannot give clear title to the property unless the mortgage holders agree.
Because mortgage holders need to approve the sale, many home sales prior to bankruptcy are approved. Still the sale may be questioned if the debtor didn't get fair market value. Cars are often subject to a security interest too and require approval from the finance company that holds the rights to the car.
Is the property protected by exemptions?
Debtors are entitled to state or federal exemptions. There are different exemptions for homes, cars, tools of the trade, household goods and other assets. If the debtor had a personal exemption in an asset and the property is worth less than the personal asset, then the Trustee will be likely to favor the sale.
The same idea holds true for equity in assets that are sold to pay off secured creditors. If the value of the property after the secured creditors are paid is less than the exemption for that asset, then the Trustee will likely approve the sale. Essentially, the Trustee will likely approve this type of sale because if the Trustee had done the sale, creditors wouldn't have gotten any money from it.
If the value of the property or the equity in the property is more than the personal exemption, then the Trustee may question the sale unless the asset was sold for fair market value and the proceeds are available.
Available means they are in a bank or financial instrument like a CD. If the debtor spent the money, then the debtor will likely have a problem.
One point to consider is that if the debtor wants to use the exemptions to keep the property, then there's really no reason to sell it before bankruptcy.
When the Property was Sold
Generally, the Trustee has authority to look at sales that were made within two years of the bankruptcy filing date. The Trustee can sue to recover property that was improperly sold. The buyer of the property may then become a creditor and have a claim against the debtor in bankruptcy court. Sometimes, when fraud is suspected, for example, the Trustee can look back much more than two years.
What Happened to the Proceeds
If the debtor just puts the proceeds in the bank or stores it in some way so the Trustee can readily get it, then that's a reason to favor the sale. But if the debtor spends the money, the Trustee is likely to contest the sale to try to get the money back and also penalize the debtor for improper use of the proceeds.
Did you use the money to pay off another creditor? If you did, the Trustee will likely try to recover the money from the one creditor so he/she can use it on behalf of all the creditors.
Did you use the money to buy exempt property? If you did (and the asset wasn't originally exempt), then the Trustee will likely disallow the exemption and seize the asset.
As with most legal matters, every case is reviewed individually. The trustee will look to see if the sale was done with the intent to defraud creditors or if it was just an unwise understanding of the laws. The trustee may look to what debts were paid with the funds. If the money was used to pay child support, a student loan or some other non-dischargeable debt - that's better for the debtor than paying off an unsecured consumer loan.
Your attorney will work to show the debtor received true value for the asset, that the assets was already exempt and that the proceeds were used properly. The best course of action, though, is to review the sale of any assets when you've thought about bankruptcy, by seeing a bankruptcy lawyer before you sell the asset.
AUTHOR: Dave Falvey
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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.