Selling Property Before Filing Bankruptcy

Anyone going through bankruptcy would like sound advice on dealing with the sale and proceeds of property they own. Read on to find information on how to properly handle the sale of your property and help your bankruptcy case move along smoothly.

Let’s start with your non-exempt equity

Non-exempt equity in a Chapter 7 bankruptcy case is the difference between the value of the property, minus all liens against it, minus all legal exemptions available to protect it.

For most people in debt, the equity calculation for their property is zero or negative, which means there is no non-exempt equity and nothing for the bankruptcy trustee to sell to pay unsecured creditors.

If you are one of the few Chapter 7 debtors that has non-exempt equity in your property, read on.

Non-exempt equity in property

Non-exempt equity in property will send up a red flag to your bankruptcy attorney, but that does not mean that you will lose property to the bankruptcy trustee. The trustee must justify the expense of taking and selling your property in a commercially reasonable manner (which usually means at auction).

If the amount of non-exempt equity is too small (called “de minimis”), the trustee will abandon his or her interest in the property and you get to keep it. Statistically, only about one in twenty Chapter 7 bankruptcy cases is considered an “asset case.”

Having too much equity in personal property can needlessly complicate your bankruptcy case. If the value of the property is significant, the Chapter 7 bankruptcy trustee will open a bankruptcy estate, take the non-exempt property, and sell it to pay your unsecured creditors. This has an obvious result: you don’t benefit from the use of the property or the proceeds from the sale.

Then, after the trustee pays the administrative costs and takes a fee for himself, there is usually little left for your creditors. A less obvious result is that your case may remain open for many more months after your discharge while the trustee administers the money in the estate.

Finally, once the Chapter 7 trustee has opened a bankruptcy estate to administer assets, the trustee may take a harder look at your case to find more money for the bankruptcy estate.

Liquidate all non-exempt property before filing

One of the easiest ways to avoid a personal property equity issue in bankruptcy is to liquidate all non-exempt property before filing. In simple terms, this means selling items that you cannot protect through bankruptcy exemptions. This is a case where selling your property may make more sense when examining your financial restructuring.

There is no general prohibition regarding selling personal property before filing bankruptcy. However, there are cautions that must be observed. The transaction must be an honest sale for an honest value, often called an “arm’s-length transaction.” Technically, this type of sale is a “transaction in good faith in the ordinary course of business by parties with independent interests. The standard under which unrelated parties, each acting in his or her own best interest, would carry out a particular transaction.” See In Re US Medical, Inc., 531 F.3d 1272 (10th Cir. 2008) citing Black’s Law Dictionary 109 (6th ed.1990).

An arm’s length transaction comes down to two components: you must receive a fair price for the property, and the transaction cannot be fraudulent. The first part of this equation is easy – just sell the property at or close to fair market value but the second part is sometimes trickier.

Selling property to a family member or close friend tend to initially raise questions. For instance, if you sold your property to a friend for a cheap price, the court may find that the property was “unfairly” sold and allow the trustee to void the sale as a fraudulent transfer. You can sell the property to anyone you want, including friends and relatives, as long as it is a fair sale and a fair price. However, the closer the relationship to the debtor, the closer the bankruptcy court will scrutinize the transaction.

Selling property or equipment

The same goes with selling property or equipment, like a back hoe, to a company that you own is of little use to protect the property. Likewise, a company facing bankruptcy that sells equipment to shareholders, officers, or members of an limited liability company will be scrutinized for insider transactions. You can see In re Longview Aluminum, L.L.C., 657 F.3d 507 (7th Cir. 2011) for more information – http://www.leagle.com/decision/In%20FCO%2020110902076.

The best and easiest way to sell property prior to bankruptcy is to conduct business with a stranger and sell the property at the fair price. Selling property at auction on ebay rarely raises eyebrows.

What to do after you’ve received the proceeds

After you receive the proceeds of the sale of any property or equipment, you must either dispose of the cash and/or protect it through a bankruptcy exemption. In most cases, simply spending the money on reasonably necessary items for your health and welfare will suffice, but care is needed here as well.

Remember it’s always advised to speak to an expert in this field so feel free to give Atty. Dave Falvey a call with any of your questions.