Property Sales and Bankruptcy

 

When you talk to a lawyer about bankruptcy, you will hear terms such as exempt and non-exempt property. One of the decisions people going through bankruptcy make is to sell off their assets to try and reap the financial benefits before the courts step in. It sounds like a great idea, but it can be a very risky decision.

Exempt Property

Just about every state allows for exempt property during a bankruptcy proceeding. Contrary to popular belief, bankruptcy does not leave you without a car and it does not leave you homeless. In most cases, you will be allowed to keep your car because you will need it to go to work. Most states allow people filing bankruptcy to keep their homes to avoid making the entire situation worse.

Prior to your bankruptcy, it is acceptable for you to sell your exempt property. Since the bankruptcy court will be unable to seize that property anyways, you are free to do whatever you want to with it. Just remember that selling your car prior to bankruptcy does not mean that you will be able to claim hardship when it comes to paying back your debt.

Non-Exempt Property

Non-exempt property is any type of property the courts feel might have value and would have to be sold to pay back some of your debt. The most common types of non-exempt property are jewelry, vacation homes, and additional vehicles. The courts may deem it necessary to liquidate these assets and use the proceeds to pay back creditors as part of the bankruptcy.

The act of selling non-exempt property before filing for bankruptcy is called prebankruptcy planning and it is frowned upon in every state. Some of the most common examples of this include selling non-exempt items and using the funds to buy more exempt items, selling the items at a loss just to avoid losing out on the money, and selling at an enhanced profit to try and pad the bank account before bankruptcy.

If you are caught doing prebankruptcy planning, then the bankruptcy court could sue you to get access to the cash you raised by selling non-exempt items. If you did not pay creditors with the money you received from your sales, then the courts could go after those sales and apply the money to your creditors. The court will have to determine your intent when selling the items, and what you did with the proceeds after sale.

In general, it is bad idea to try and sell property (exempt or non-exempt) at least 90 days prior to filing for bankruptcy. These types of activities can be suspicious, and the bankruptcy court could delay or even deny your bankruptcy based on these activities. It is best to discuss your situation with your bankruptcy attorney and use whatever they feel is the best course to take.