Should you sell things before filing bankruptcy in Minnesota?
There are safe ways to sell property before or during a bankruptcy, and there are ways that can harm the seller, and even the buyer.
In the time before filing for bankruptcy, people often want or need to sell some of their property.
For example, it might be time to sell an old car, or some tools to pay bills.
So, the short answer is:
- Yes, but check with your Minnesota Bankruptcy lawyer to make sure you are doing it correctly
How can a sale harm your Chapter 7 or Chapter 13 Bankruptcy?
People are often worried that if they sell things before filing bankruptcy it might harm their bankruptcy, or somehow get them in trouble with the courts.
This worry is legitimate because:
- If you sell something the wrong way, especially something that is worth money, then the bankruptcy trustee can undo the transaction
- In some cases they even use such a sale as a reason to deny you your discharge, which is the court order that removes your debts
When can this happen?
- When you sell the property for less than reasonably equivalent value, especially if you sold it to a business partner or family member
This is called a fraudulent transfer.
What is a fraudulent transfer?
A fraudulent transfer is where the courts think that you should sell your property for full value, and then use the money to pay your creditors.
- If you sell your 10-year-old car, valued at $5,000 to your brother for $1, then you have committed a fraudulent transfer
- In the eyes of the bankruptcy court, you should have sold it for the $5,000 that the Blue Book says it is worth
You should have then used that money to pay off some of your debts.
What happens next?
In this situation, the bankruptcy trustee will sue your brother who bought the car for either $4,999, or for the return of the car.
If you make this sale to an insider (family, or business partners), then the trustee can even move to deny your discharge.
This is disastrous for two reasons:
- The bankruptcy will not happen, and your debts are not discharged
- Your brother will be very angry with you since you got him in trouble with the courts
What is the right way to sell things before filing bankruptcy?
The most important thing is that you sell it for reasonably equivalent value.
If you are selling land or a house, then you should hire an appraiser to make sure that you sell the property for fair value.
What else is required?
Keep any document you get about the value of the property because the bankruptcy trustee might not agree with your number.
Such documents include:
- Printouts from websites
- Appraisal reports
- Blue Book
Also make sure to sign a bill of sale, and transfer the title or deed if there is one.
A bill of sale is a simple documents which says that eg:
- I, (Seller), sell to you (Buyer), my 10-year-old car for $5,000
Both parties should sign and date this document.
What should you do next?
When you have completed the sale, you need to:
- Take the money and deposit it in a bank so that you have a paper trail
- Keep receipts for what you buy with the money, if anything
So long as you sell the property for reasonably equivalent value, it is OK to sell it to a family member or business partner.
- It is best to sell to someone that you have no relationship with, because dealing with family always invites scrutiny from the bankruptcy trustee
Website such as:
Provide a fast and cheap way of selling many types of property to strangers online.
If you are selling a car, sporting equipment, antiques, or other niche or specific items, you may want to look for more focused websites to help you get a better valuation and price for your items.
What might the Bankruptcy trustee ask?
The Bankruptcy Trustee might ask how you spent the money.
So it is important that you are able to show them that you spent it in ways that will not harm your bankruptcy.
If you’re thinking about selling items then speak to an experienced Minnesota Bankruptcy attorney to help you ensure you get the right advice.
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