Can You Sell Assets Before Filing for Bankruptcy?


When bankruptcy is on the horizon, you may start to consider the best way to maximum your exemptions and financial savings. Before you begin selling off your nonexempt assets without a second thought, you should make sure you are aware how this will impact you in the future.

If you sell or even transfer property right before filing for bankruptcy, it could result in frustrating circumstances. In some cases, a bankruptcy trustee may be granted permission to recover the transferred property. Other penalties you could face include a denial of exemptions or debt discharges. With so much financial uncertainty on the line, it is always better to play it safe rather than risk losing more property.

What exactly will the court look at?

  • What type of property was involved (exempt or nonexempt)
  • The date when the transfer was made
  • Whether or not you were given fair value for your assets
  • Where the proceeds went from this sold property
  • What your alleged motivations for transferring the property were

For exempt property, the court will typically not raise many objections, as this is property that you would have already been allowed to keep.

Exempt vs. Nonexempt Property

Since selling exempt property is much more acceptable than selling nonexempt property, it is important for you to understand what property falls into each category so you can remain safe.

For example, exempt property often includes the following in Arizona:

  • Up to $150,000 of residential property
  • A motor vehicle worth up to $6,000
  • Up to $500 in musical instruments
  • Up to $2,000 in wedding rings
  • Up to $6,000 in household furniture, etc.
  • Up to $5,000 in trade implements

Keep in mind that if you would like to keep your exempt property, there is no need to sell it since you will not lose it by filing for Chapter 7.

On the other hand, nonexempt property is anything that is not subject to the state’s property exemption laws. This type of property can be sold by a bankruptcy trustee in Chapter 7 in order to satisfy creditor debts. That is why transferring or selling off this type of property can get some consumers into trouble, especially if they sell right before filing. Even though it may seem appealing to try to sell off nonexempt assets and purchase up more exempt assets prior to filing, this could create more complications and financial burdens once all is said and done.

“When can I be penalized for selling assets?”

If the court determines that you engaged in pre-bankruptcy planning (selling or transferring assets with the intention of keeping them away from creditors) you could face some serious penalties. How far back the courts can look into your property sales will depend on the type of property involved and the reason it was sold or transferred. In some cases, the court may be able to look back as far as 10 years.

The court will also try to determine if you received fair market value for your assets. If you did not receive a fair sum for this property and it is determined that there was some intention to hinder or delay creditors, a lawsuit could be filed to recover the property. The trustee can review all transfers or sales made within the last two years or more.

Another issue the court will review is what you did with the proceeds, such as investing in more exempt property or increasing the value of your already exempt property. Overall, it is their job to determine your intent and decide whether or not your aim was to defraud your creditors.

Though it can seem challenging, pre-bankruptcy planning can be an invaluable tool in ensuring you have a successful filing. Talk with the Phoenix bankruptcy lawyer at our firm today if you would like to discuss making a financial plan for your case .