Is Selling Assets Before Filing Bankruptcy a Good Idea?

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If you are seriously considering bankruptcy, there are several things that you should and should not do before filing bankruptcy under Chapter 7.  One of the most important things that you should do before filing Chapter 7, is to seek help from an attorney or certified credit counselor in order to make sure bankruptcy is the best option for your future.

Assets in Bankruptcy

Selling your assets prior to a bankruptcy is generally not something a bankruptcy attorney would recommend that you do; in fact most would tell you to avoid selling your assets.

In order to understand why selling your assets before bankruptcy is not recommended you need to understand what happens to the assets that you have immediately upon filing bankruptcy:

  • Your assets become part of your "bankruptcy estate".
  • The assets that are in your bankruptcy estate are used to repay your creditors as much as possible.
  • All assets are sold to reduce them to cash.
  • The sale of your assets is managed by the bankruptcy trustee, who is charged with getting the best price for the assets that are to be liquidated.
  • Every state allows you to "exempt" certain items from being included in the bankruptcy estate; in other words, there are certain items that you will be allowed to keep won't be sold to pay your debts. An example of this might be the car that you drive to work or a certain amount of household goods or the tools that you need to ply your trade.

Selling Before Bankruptcy

If your assets are to be liquidated anyway, why shouldn't you sell them yourself before declaring bankruptcy?

  • This could be construed as bankruptcy fraud and an attempt to interfere with the bankruptcy, or hide your assets particularly if the items sold were purchased by friends or family members for considerably less than fair market value.
  • Bankruptcy fraud can carry criminal penalties.
  • Even if the sales were for fair market value and to strangers, what you do with the funds received could be questioned by the court.
  • If you used funds received from the sale of assets two months before declaring bankruptcy to preferentially repay one creditor over others, that is not allowed either and the creditors you paid back could have to turn the money over to the bankruptcy trustee.
  • Your bankruptcy discharge can be denied.

Get Legal Help

Hire an experienced bankruptcy attorney to analyze your financial situation and advise you which type of bankruptcy is suitable. Your attorney can help you protect your assets using state allowed exemptions, and can explain what you can and cannot do before and during your bankruptcy.

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