Selling Property Before Filing for Bankruptcy in California

If you are thinking about declaring bankruptcy, you're likely in a tough financial state. You might consider selling items that are more valuable and use the proceeds to sustain yourself. Although this is permitted in certain cases, you could suffer serious repercussions if it's done incorrectly (particularly if you are intending to avoid repaying your lenders).

When filing for chapter 7 bankruptcy, the bankruptcy trustee will seize any valuables that are not exempt, sell them, and then distribute the proceeds among your creditors. In this blog, we’ll go through what you need to know about selling your property before filing for bankruptcy.

Selling Your Assets Before Declaring Bankruptcy

If it is done for valid reasons, selling property before declaring bankruptcy is acceptable. When you are short on funds, selling a valuable item could be a quick and easy way to raise the funds you require.

You can dispose of your assets to cover your expenses if you require money to purchase items like:

  • Food.
  • Clothing.
  • To cover rent.
  • Make utility payments.

For instance, you could sell your guitar if the proceeds will help you buy your family some food. However, you should put it on sale for the amount of money that it is worth and utilize the proceeds to purchase the goods that you require. Keep proper records of the sale and where you spent the funds.

Transferring or Gifting Property

If you want to declare bankruptcy, you must be extremely cautious when transferring valuable assets. If you immediately declare bankruptcy after giving away or transferring your assets at an extremely low price or for free, this could be deemed fraudulent activity in the context of Bankruptcy.

The reason for this is that if you file for bankruptcy under Chapter 7, the trustee will liquidate any non-exempt assets you own to get money to repay your lenders. To put it another way, you might have to give certain possessions up.

You can't get around this by "giving" or transferring ownership of your assets to somebody else before declaring bankruptcy. For instance, you are not permitted to legally "gift" or transfer an asset like a four-wheeler to a member of your family to prevent the asset from being a part of the bankruptcy and being liquidated by the trustee. Attempting to do this could be deemed fraud.

You have to be honest with the bankruptcy trustee about any property sales or transfers that occurred before filing for bankruptcy. The court will consider the timing of the sale or transfer, the amount received, and the purpose of the funds in deciding the validity of the transaction.

What is Considered Exempt Property?

In the event of bankruptcy, you are allowed to keep any assets that are classified as "exempt," meaning they cannot be seized by your creditors to pay off a debt.

The following are common types of exempt property:

  • Some proprietorship in your main residence and your vehicle.
  • Clothing, and household items.
  • Individual Retirement Accounts that qualify under ERISA.

The state law will dictate the types of property that are eligible for protection. It's important to note that while each state provides its set of exemptions, certain states provide you the option of using either the state or federal scheme. However, California is not one of these states.  Every property that isn't covered by an exemption is considered nonexempt property.

The following is a description of what occurs to property that is not exempted under the two basic bankruptcy chapters:

When you file for bankruptcy under Chapter 7, the trustee will liquidate your nonexempt assets and utilize the funds to pay off your unsecured lenders or those whose obligations are not secured by a property.

In Chapter 13, you have to repay your unsecured lenders either your disposable earnings or the sum of the nonexempt assets, whichever is larger.

When Can Non-Exempt Property Be Sold?

Your property belongs to you. You're allowed to dispose of it before declaring bankruptcy. Nevertheless, you are also obligated to pay back your outstanding debts and if you take deliberate actions to keep your creditors from receiving funds, this could be considered fraud. While selling property before declaring bankruptcy could be difficult, it is possible.

If you're in desperate need of money for basic living expenses, selling your property is a viable option. Don't be reluctant about selling your boat or any other valuable property if doing so will free up enough cash to cover essentials like housing, food, clothes, or medical care. Simply sell it for its fair market price and keep accurate records. The plain truth is that many people are usually short on money before declaring bankruptcy but could sell property and utilize the proceeds to cover your basic expenses.

Otherwise, seek legal counsel first. Conversely, if you want to sell your property for a different reason, you should consult a bankruptcy attorney. The lawyer could either advise you on how to proceed or show you why sparing a few dollars isn't worth getting into trouble with the bankruptcy courts.

Issues With Selling Non-Exempt Property

The majority of the time, luxury possessions that aren't required to keep a job or run a home are considered nonexempt property. These are often the first things to be sold when times are tough financially. The following elements will determine whether or not a pre-bankruptcy property sale or transfer will get you into legal trouble:

  • Whether the assets were exempt or not.
  • Time of the transfer.
  • If you obtained the property's fair market value.
  • How you spent the money, and
  • The reason behind your transfer.

Here is how each of these factors can be perceived by the court:

Did You Undertake Any Pre-Bankruptcy Planning?

You won't run into any trouble if you sell exempt properties before filing for bankruptcy since the trustee wouldn't have been able to liquidate them in the first place. However, selling an exempt property when it is bankruptcy-protected is rarely necessary.

However, it'd be best if you can sell your nonexempt assets and utilize the money to purchase more exempt assets or settle any mortgages or liens on exempt assets. This is when things become risky.

Pre-bankruptcy planning typically entails disposing of nonexempt assets to optimize or increase your exemptions once you believe or think that you could declare bankruptcy. The bankruptcy regulations forbid pre-bankruptcy planning, particularly if it's undertaken to defraud, hinder, or defraud creditors.

How Long Ago Did the Transfer Occur?

The court has the authority to go to the past and look into a transfer of property or a sale that took place before bankruptcy. The length of time a court will look into a property transfer depends on the property as well as the motive for the sale or transfer. The review process often goes back one or two years, although, with some kinds of transfers of property, the court could review records going back ten years. When you complete the bankruptcy papers, you will be required to reveal earlier sales or transfers on the formal paperwork.

Did You Get the Property's Fair Market Value?

The transfer could have been made to impede, defraud, or delay creditors depending on whether you obtained a fair value for the property. The bankruptcy trustee could initiate a lawsuit (known as an adversary proceeding) to retrieve the transferred assets if you didn't receive a fair market value for them.

Once the bankruptcy trustee has recovered the property, the individual who got the transfer can file a claim to reclaim the money. Your exemption right would probably be forfeited if you had been able to declare the property in question as exempt.

What Purchases Did You Make With the Money?

The transfer would probably be investigated if you made any new exempt property purchases, boosted the value of any existing exempt property, gave preference to one creditor over another, or paid for upscale services like a pricey vacation. Here are some examples of what might occur in your situation:

If you favor a creditor over all others by reducing their debt with the property or proceeds of the transfer, a bankruptcy trustee would file a case against the creditor to retrieve the payment or property. This enables the trustee to use the proceeds to settle all lenders equally. The same rule applies to any payments made to outsider creditors within ninety days of filing bankruptcy, as well as any payments made to insider lenders, like family members, within the first year of filing bankruptcy.

Depending on your intentions, the court could invalidate the exemption, limit the exemption amount, or refuse your discharge outright if you bought new exempt property or raised the price value of your exemptions.

What Was Your Intention While Making the Transfer?

The courts will evaluate your testimony as well as the facts surrounding the transfer to determine your intent. Each situation is unique, and you cannot rely too much on what has been approved in the past to decide whether a specific transfer will be allowed.

To ascertain your intention, courts usually search for "badges of fraud," which could include an assessment of:

  • Whether you got a fair price on the property.
  • Whether the property transfer was made to a relative or another close friend.
  • Whether you were still in charge of the property.
  • What was left over after making the transfer.
  • Whether you were threatened with legal action and the move was made to avoid it.
  • Your financial standing right before or at the moment of the transfer.
  • Whether you kept the transfer a secret.

Fraudulent Transfers

There is no guarantee that a transfer is fraudulent simply because it took place during a lookback period. The Bankruptcy Code distinguishes between two kinds of fraudulent transfer (often known as fraudulent conveyances):

  1. Actual Fraud

The intent behind the transfer, or the motive for the transfer, is the deciding factor in establishing whether or not a transfer was fraudulent. If a property was transferred to mislead, delay, or defraud your creditors, that transfer would constitute actual fraud. Therefore, if you transfer a property to keep it out of the reach of your creditors during a bankruptcy proceeding, you have committed actual fraud.

  1. Constructive Fraud

Contrary to actual fraud, this type of fraud could occur even if there was no intent to mislead or defraud someone. To qualify as constructive fraud, a property transfer should meet both of these requirements. First, the amount you received ought to be less than what the property was worth. For instance, you sold your vehicle for $10,000 despite the fact it was worth $19,000 since you needed the money right then. Another example would be donating assets.

The second condition for constructive fraud is that you should have been insolvent at the moment of the transaction or that the property transfer caused you to become insolvent. Insolvency occurs when the total amount of your obligations exceeds the total worth of your property. By law, it is assumed that you had been insolvent for the ninety days preceding the date you declared bankruptcy. A transfer should satisfy both conditions to be considered constructive fraud.

Non-Fraudulent Transfers

Some property transfers are not deemed fraudulent even if they occurred during the lookback period. When you sell a property to an individual for its fair market price, the transfer is often not fraudulent. In this case, the assets that were left in your estate are roughly equal in value to the cash or assets you got in exchange. This means that the transfer did not affect the overall worth of your assets.

In most cases, a transfer is not illegal if the asset involved was exempt at the time of transfer. If so, it's unlikely that the transfer will be regarded as fraudulent since the exemption will prevent the bankruptcy trustee from liquidating or selling the asset even if they retrieved it back.

The transfer is also unlikely to be fraudulent if you gifted the property with no actual market worth. Property that has little to no resale worth has no bearing on the valuation of the bankruptcy estate. In other words, even if the property was returned to the trustee, the proceeds from its sale would not be significant for the estate.

How You Can Correctly Document Your Sales

Proceeds of nonexempt properties made before declaring bankruptcy will be reviewed by the bankruptcy court to establish your intention and assess the presence or absence of fraudulent activities. Usually, they will look through the following:

  • If you received a fair market rate price for the product.
  • Your financial standing at the time the sale was made.
  • If you transferred your property to a close friend or family member.
  • If you retained ownership of the property.
  • Whether a lawsuit threat prompted the transfer.
  • If you tried to keep the transfer a secret.
  • What remained after the transfer.
  • What did you use the proceeds on.

If you transfer assets or property to another person in a bid to cover your obligations, you should include this information in the Statement of Financial Affairs for persons who are declaring bankruptcy. You should provide any information that could aid the bankruptcy court and trustee in understanding the transfer's purpose.

Find an Experienced Sacramento Bankruptcy Attorney Near Me

If you are concerned about how transferring or selling your property could influence your eligibility to declare for successful bankruptcy, you can contact the Sacramento Bankruptcy Lawyer. With years of expertise handling bankruptcy cases, our lawyers can respond to your inquiries about what is and isn't acceptable when it comes to transferring or selling your property before filing for bankruptcy. Call us today at 916-800-7690.

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Here at Sacramento Bankruptcy Lawyer, we set ourselves apart from other firms because we provide direct client to attorney contact from the initial consultation all the way through the discharge in your particular case. We will not pawn your case off to a staff member at any point through the process. When you call Sacramento Bankruptcy Lawyer, you WILL speak with local Sacramento Bankruptcy Lawyer Pauldeep Bains. Please call Sacramento Bankruptcy Lawyer ASAP at 916-800-7690 to schedule your FREE in-person or phone consultation with Pauldeep Bains and let Sacramento Bankruptcy Lawyer begin getting you the fresh start that you deserve.

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Do not let another day go by without knowing your legal options. Contact Sacramento Bankruptcy Attorney today and you will hear from our highly qualified and knowledgeable attorney who looks forward to speaking with you at your earliest convenience.


Do not let another day go by without knowing your legal options. Contact Sacramento Bankruptcy Attorney today and you will hear from our highly qualified and knowledgeable attorney who looks forward to speaking with you at your earliest convenience.