Just Selling Your Stuff Before Bankruptcy May Not Be A Great Idea

Let’s say that you are thinking of filing for bankruptcy. Although most people who file for bankruptcy don’t lose much of any of their property, you are concerned, and so you have what you think is a bright idea: Sell your stuff before your bankruptcy. Will this work?

Practical Problems

Technically, there is nothing illegal about selling your property, even right before a bankruptcy. But before discussing the legalities, there is a practical aspect to selling your things before you file for bankruptcy: What do you do with the money from the sale?

It may, depending on your situation, be possible to sell your property and use the money for necessities: utilities, mortgage payments, car repairs, food, or some other regular recurring bill that is necessary for your household.

Money is property or assets in a bankruptcy. All you have done by selling something is convert tangible personal property into money, and that money could potentially be taken by a court if it is sitting in a bank account.

Additionally, money has an absolute value—however much money there is. But with property, your bankruptcy attorney can argue that it’s worth less than what a trustee may think it’s worth. So by converting property into cash, you’ve actually lost a tactical advantage.

Risking Exempt Assets

Another problem that people run into thinking they are outsmarting the system: They sell non-exempt property and try to “hide” the money by putting it into exempt property such as a home. Doing this can jeopardize the exempt property, and lead to it being taken when it ordinarily would not and could not have been taken.

Fair Value and a Real Sale

There is another caveat when you sell property before a bankruptcy: You must sell the property for about what the property is worth. You cannot just unload everything you own for pennies on the dollar. This is a strategy many people try, where they sell their property to mom for $10 knowing they’ll get it all back later.

But that won’t work, because the court needs to see that any pre-bankruptcy sale of property was a legitimate sale, and the biggest indicator of that is that you received fair value for the property that you sold.

Clawback Lawsuits

Making the situation worse, if you sell property to any friend or relative, at a reduced price, you can invite what is known as a clawback lawsuit. This is where the bankruptcy trustee sues whoever “bought” the property (mom, in our example above) to get the property back. That’s right—your attempt to evade the bankruptcy court has now led to dear old mom being dragged into a bankruptcy lawsuit against the trustee.

Legitimate Sales

Generally speaking, the longer before your bankruptcy is filed, and the more “distant” the purchaser is to you (for example, strangers are better than friends, business associates or relatives), the more likely it will be that the sale of your property is considered legitimate.

Contact the Boca Raton bankruptcy attorneys at the Law Offices of Stephen Orchard at 561-455-7961 today for help and to avoid mistakes people who file bankruptcy commonly make.

Source:

news.bloomberglaw.com/bankruptcy-law/expanding-the-fraudulent-conveyance-look-back-period