Having too much equity in personal property can needlessly complicate your bankruptcy case. If the value of the property is significant, the Chapter 7 bankruptcy trustee can take the “non-exempt” property and sell it to pay your unsecured creditors. This has an obvious result: you don’t directly receive the benefit of the property. Additionally, after the trustee pays the administrative costs and takes a fee for himself, there is usually little left for your creditors. A less obvious result is that your case may remain open for many more months after your discharge while the trustee administers the money in the estate. Finally, the trustee may take a harder look at your case for more money for the bankruptcy estate.
One of the easiest ways to avoid a personal property equity issue in bankruptcy is to liquidate all non-exempt property. In English, this means selling items that you cannot protect with your bankruptcy exemptions. Selling your property may make a great deal of sense when examining your financial restructuring.
There is no general prohibition regarding selling personal property before filing bankruptcy. However, there are cautions that must be observed. First, the transaction must be fair and honest. You must receive a fair price for the property and the transaction cannot be fraudulent. The first part of this equation is easy – just sell the property at or close to fair market value. The second part is harder. Selling property to a family member or close friend will always raise questions of insider shenanigans. Likewise, selling a property or equipment, like a back hoe, to a company that you own is of little use to protect the property. The best and easiest way to sell property prior to bankruptcy is to conduct business with a stranger at a fair price. Selling property at auction on EBay rarely raises eyebrows.
After you receive the proceeds of the sale, you must either dispose of the cash or protect it with a bankruptcy exemption. In most cases, simply spending the money on reasonable and necessary items for your health and welfare will suffice, but care is need here as well. If you have excess equity in personal property, discuss your situation with your bankruptcy attorney. Your attorney can advise you on the best way to protect or sell your assets, including proceeds from the sale of personal property.