Selling assets before bankruptcy is a delicate matter that should be handled with care. When you file for bankruptcy, there are certain properties that you can protect or exempt from being seized. However, selling or transferring properties that are not exempted before filing for bankruptcy can be a risky move.
While it may be permissible in certain situations, if done improperly, particularly if your intention is to evade paying your creditors, it could result in serious repercussions. It is crucial to seek the guidance of a legal expert and ensure that all the proper procedures are followed when selling assets before bankruptcy.
What Is Exempt Property?
Creditors cannot take the exempt property to pay a judgment against your creditor. However, if you file bankruptcy, this property can be kept. Exempt property can be taken by creditors to satisfy a judgment against you.
- Equity in your primary residence, as well as in a motor vehicle
- Clothing and household goods
- Retirement accounts that are ERISA-qualified
The protection of property during bankruptcy is determined by state law, which can vary depending on where you reside. Each state has its own set of exemptions that dictate which properties can be safeguarded from seizure. However, in some states, you have the option to choose between state exemptions and the federal exclusion scheme. It’s important to note that an exemption can only be applied to properties that are eligible for protection. Any property that does not fall under the list of exempt properties cannot be protected. Therefore, it’s crucial to understand the exemptions available to you and the eligibility criteria before filing for bankruptcy.
These are the consequences of nonexempt property in bankruptcy:
- Chapter 7 bankruptcy: The bankruptcy trustee will sell any nonexempt property to pay your unsecured creditors (those creditors who aren’t secured with collateral).
- Chapter 13 bankruptcy: This will require you to pay your unsecured creditors either your disposable income or the amount of your nonexempt assets.
What Is the Best Time to Sell Non-exempt Property?
You have the right to sell your property before filing for bankruptcy, as it is your personal possession. However, you must also ensure that you pay your creditors what you owe them. It is important to avoid intentionally depriving others of funds, as this could be considered fraudulent.
While it is possible to sell property before filing for bankruptcy, it can be a complicated process. To stay on the safe side, it is best to proceed with caution and seek the guidance of a legal expert.
- You can sell your property when you have to. Use the money you make to purchase the necessities of life. Keep good records and sell them for what it is worth. You can sell your property and use the money to pay for your necessities, which is the simple truth of bankruptcy.
- Get legal advice first. You can also meet with a bankruptcy attorney if you want to sell your property. An attorney can help you achieve your goals or explain why it’s not worth risking getting into trouble with the bankruptcy court.
Issues Related to Selling Nonexempt Property
These luxury items are often not exempt and can be a problem if money is tight. These factors will determine whether a pre-bankruptcy property transfer or property sale will result in you being in serious trouble.
- Whether the property was exempted or not
- When you completed the transfer
- Whether the property was worth its fair market value
- How you spent the proceeds
- Why you made the transfer
This is how the court might view each of these elements.
Did You Engage in Pre-Bankruptcy Planning?
It’s not a problem to sell the exempt property before filing for bankruptcy. The trustee could not have liquidated it anyway. There is no reason to sell the exempt property if it would be protected by bankruptcy.
It would be great if all your non-exempt property could be sold and the proceeds used to purchase more exempt properties or to pay off liens or mortgages. Here is where things get risky.
Pre-bankruptcy planning is the selling of nonexempt property in order to increase or maximize your exemptions. Pre-bankruptcy planning is discouraged by bankruptcy law, particularly if it’s done to defraud, delay, or hinder creditors.
How Long Ago Was the Transfer?
A court can go back in time to investigate the sale or transfer of property prior to bankruptcy. The type of property and the reason for the transfer will determine how far back the court will look. The review period for most cases is one to two years. However, certain types of transfers can be reviewed back up to ten years.
Was the Property Worth Its Fair Market Value?
In determining whether the transfer was made to defraud, delay, or hinder creditors, it is important to determine if you received fair value for the asset. To recover the property, the bankruptcy trustee may file an adversary proceeding if you didn’t receive fair value.
The trustee will then recover the property and the recipient of the transfer can file a bankruptcy case to try to get their money back. You would likely lose your exemption right if you could have claimed exempt the property.
What Did You Buy With the Proceeds?
It’s possible that the transfer of exempt property will be questioned if you have purchased exempt property or increased its value. Here are some possible outcomes in your case:
If you favor one creditor over another, by paying down the debt to that creditor with the proceeds of the sale or property, the trustee can file a lawsuit against that creditor to recover the payment. This will allow all creditors to receive the same amount. This applies to all payments to general creditors made within 90 days of the bankruptcy filing, and insider creditors that were made within one year.
You could be disqualified if you purchase exempt property, increase the value of your exemptions or limit their amount.
What Was Your Intent When You Made the Transfer?
The court will try to infer your intention from the circumstances surrounding your transfer. They will also take into consideration your testimony. Each case is unique and you cannot rely on the precedents to decide whether a transfer you made will be allowed.
Courts will often search for “badges” of fraud to determine your intent. This may include reviewing:
- Whether the property was fair-valued
- Whether you retain control of the property
- Your financial situation at the time or shortly after the transfer
- Whether the transfer was to a close family member or another person
- If the transfer was made in response to a threat of a lawsuit against you
- Whether you kept the transfer secret
- What you left behind after the transfer
Rules Preventing You from Sheltering Nonexempt Funds in Exempt Residential Property
You can sell the nonexempt property within 1,215 days of filing your bankruptcy petition and use the proceeds to improve the value of your homestead residence by paying down the mortgage, making repairs, or buying a house that is more expensive. The court may reduce your state exemption for homestead exemption to the extent that the increase exceeds a certain limit. The cap amount is subject to change periodically. In these cases, the court does not have to consider your intention behind the sale.
The reduction should not be triggered by merely maintaining or repairing your home or using proceeds from the sale to pay your regular mortgage payments. The rule doesn’t apply if proceeds are transferred from an older residence to a new residence within the same state.
Need More Info? Contact a Bankruptcy Attorney Today!
Act now to protect your assets before bankruptcy! If you’re considering filing for bankruptcy, it’s important to speak with an attorney about selling your assets beforehand. Don’t wait until it’s too late! Contact Bruner Wright today to schedule a consultation with an experienced bankruptcy attorney who can help you safeguard your assets and make informed decisions about your financial future. Call us now at 904.432.1200 and take control of your financial situation.
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