There are a few things debtors can do before filing bankruptcy that can end up hurting their bankruptcy case. In some cases, those actions taken before filing for bankruptcy can result in the loss of property or not receiving a discharge.
If you are having financial problems, it may seem logical to sell items for cash, which you can use to pay your bills. However, selling or transferring property right before filing bankruptcy can cause problems with your bankruptcy case, as well as for the people who received those items.
Transfers before Filing for Bankruptcy
Bankruptcy laws prohibit debtors from disposing of assets before filing bankruptcy for less than fair market value. “Transfers of property” include selling assets or giving them away. If a debtor sells an asset before filing bankruptcy, the trustee appointed to administer the case will investigate the transfer to determine if the transfer was fraudulent. A fraudulent transfer is one in which the debtor gave the property away for no value or sold the property for less than the property is worth.
For example, if you own a boat that is worth $5,000 but sold the boat for $1,000 two months before filing bankruptcy, a Chapter 7 trustee has the right to sue the buyer to void the transfer. The trustee will then sell the property and use the money to pay your creditors. In a Chapter 13 case, the trustee will not void the transfer; however, you will be required to pay the difference between the sales price and the value of the item to your unsecured creditors through your bankruptcy plan. This will increase the amount of your monthly payments.
Another example of a fraudulent transfer is when a debtor gives his boat to a relative to “hold” during the bankruptcy so that the trustee will not sell the boat in order to pay creditors. The trustee will void the transfer and take the boat. Giving away your property to hide it from the bankruptcy trustee is a bankruptcy crime that is punishable by fines and possible jail time.
Is There a Right Way to Sell Property Before Filing for Bankruptcy?
You can sell property before filing bankruptcy; however, you must make sure that the property is sold for the fair market value. If you sell any assets before filing for bankruptcy, you must report the transfer on your bankruptcy schedules and account for the money you received for the sale.
If you used the money for pleasure (i.e. a two-week Hawaiian vacation) instead of toward your debt or essential living expenses, this may be viewed as an abuse of the bankruptcy process. However, if you use the funds received from the sale to pay normal living expenses (i.e. rent, mortgage payments, car repairs, clothing, food, etc.), it may be acceptable to sell an item before bankruptcy. However, you must be careful to document exactly how the money was used.
You are also not permitted to use that money to repay relatives within one year of filing bankruptcy. This is considered a preference. The trustee will demand that your relative turn over the money to the bankruptcy trustee. If your relative refuses to return the money to the trustee, the trustee will sue your relative through the bankruptcy court to recover the money you paid him or her. If you want to repay your relative, you must wait until after your bankruptcy case is closed.
Consult a Bankruptcy Attorney before Selling Assets or Giving Items Away
If you are struggling financially and considering bankruptcy as an option, you should consult with a bankruptcy attorney before making any decisions to dispose of assets. Your attorney can help you plan a strategy that will be in your best interests. If you are selling an asset, your attorney can advise you how this will affect your bankruptcy filing and how you should use the money you receive from the sale.
If you have sold an asset recently, you can still file a bankruptcy case. This area of bankruptcy law can be complex and involves many elements; having an attorney on your side will make this process much easier.
Help through Your Bankruptcy Process
If you are struggling with paying bills and supporting your family, you can find relief through bankruptcy. Contrary to popular belief, many debtors don’t lose any assets through filing bankruptcy – this is a common misconception. So, before you begin selling your property, schedule a free consultation with us and we can help you determine the best plan of action.