It depends. Could you claim an exemption to protect that property in bankruptcy? Then selling that property might be okay. If you want to sell nonexempt property, however, you could face serious legal complications down the road. Read on to understand how exemptions affect your ability to sell your property, and how selling assets pre-bankruptcy could land you with underserved accusations of fraud.

First of all, is the property exempt or nonexempt? Exempt property would include a car that you could claim a motor vehicle exemption for, or a house that would be shielded by a homestead exemption. The types of exemptions available vary from state to state. Any property that is not exempt could be liquidated by the trustee in Chapter 7 bankruptcy, and the proceeds would be used to pay off creditors. Naturally, you might want to sell your nonexempt property and buy property that would be exempted from bankruptcy, for example. Or you may simply want to pay off some debt by selling your nonexempt property. But don't do it, not before consulting a lawyer. The sale could create severe trouble otherwise.

How Bankruptcy Courts Investigate Pre-Bankruptcy Sales

If a bankruptcy court thinks that you sold nonexempt property to keep it from being used to pay off creditors, the court could think that you entered bankruptcy in bad faith, trying to swindle creditors. The court may want to only investigate sales that occurred close to the bankruptcy to ensure that there was nothing shady about the transfer, but in some cases, they may investigate transfers from as much as ten years ago.

Then the court will look to see if you got a fair market value for the property you sold. If you sold the property for far less than it was worth within the past two years or so, a bankruptcy trustee might think you were hindering or defrauding creditors. Even if the property would have been exempt, you could lose out on this exemption, just one of several messy complications you could be faced with in your bankruptcy because of the transfer.

Another key feature of the investigation is what you used the profits for. Let's say that within the year leading up to you filing for bankruptcy, you sold nonexempt property to pay off a relative who gave you a loan instead of equally distributing the proceeds among all your creditors. The trustee might sue your relative for the excess payment so other creditors could be paid off too. If you sold the property in order to buy exempt property, or to boost the amount you could claim in exemptions, then you might be denied the exemption, or even refused a discharge of your debts. If you spent the money on a lavish vacation instead of on creditors, this could look very bad too.

If you don't go about it right, you could be lose exemptions, miss out on a discharge, and more if you sell property before filing for bankruptcy. To make sure that you're taking the right steps for your financial future, be sure to talk to a bankruptcy lawyer today!