Thinking about filing bankruptcy?
Folk wisdom supplies many “rules” about the period leading up to actually filing bankruptcy:
- Don’t sell anything
- Don’t pay anyone
- Don’t make any money
This kind of thinking will have you frozen in time and space like this insect in amber.
Only, this folk “wisdom” is all wrong.
Here’s how to manage money before filing without messing up your right to a bankruptcy discharge.
Sell stuff for what it’s worth
Bankruptcy law objects if you dispose of assets for less than they are worth. It’s not the sale that might be objectionable, it’s the price.
When you transfer an asset for less than its real value, there is less for your creditors. And Anglo Saxon law since the Statute of Elizabeth in 1571 has prohibited gifts, bargain sales, or sham transfers that have the effect of reducing your assets.
Transfers where you dispose of an asset for less than its fair market value are called fraudulent transfers.
The transfer can be actually fraudulent, where you intended to hide an asset from creditors. Or, constructively fraudulent. Those transfers can be innocent or even benevolent, as when you make a donation to charity.
But, if you got less in return than you gave up, it may be a fraud on creditors.
Fraudulent transfers in bankruptcy
Bankruptcy law frowns on fraudulent transfers.
The bankruptcy trustee is empowered to recover the assets or money transferred within 2 years of the filing from the recipient if the transfer was fraudulent.
That strips the benefit of the transfer from the transferee.
In many cases, even when a transfer is fraudulent, it isn’t worth the expense to the bankruptcy trustee to recover it. The benefit to creditors as a group is just too small or too tenuous to make it worthwhile.
But for the debtor in bankruptcy, significant transfers of assets with intent to hinder, delay or defraud creditors constitute a ground to deny an individual a discharge in bankruptcy. 11 USC 7272(2).
Sell for today’s value
You are absolutely free to dispose of assets before your bankruptcy is filed if you get “reasonably equivalent value” in return. That’s legalese for getting what it’s worth.
Remember, it’s only worth what a buyer will give you for this particular asset, on this day, in this market.
The stuff may be worth far less now than it was when you bought it. It may be that the market is glutted or the thing is obsolete, worn, or out of fashion.
If you get about what the market says it’s worth, you’re OK.
If you are selling on the eve of bankruptcy, just make sure that you expose the asset to the market. That may be Craig’s List; e Bay; Auto Trader or like marketplaces. Even a garage sale will do.
Keep a record of the steps you took in your sales campaign.
Disclose the transfer in the bankruptcy schedules and the Statement of Financial Affairs.
And if it genuinely doesn’t have any market value, you’re free to donate it or junk it.
More
What not to do before bankruptcy
Who cares about your spending habits before you file
The trick to spending money before filing
Image licensed by Anders L. Damgaard under Creative Commons license 3.0.
