I’ve been practicing law for about 12 years now, but never have I had to deal with the following scenario so often or in such detail. In fact, I would say that the issue presented in this post has come up maybe 5 times as often this year as in any time in the past. Perhaps it’s just because the volume of bankruptcies is so high. Perhaps the recession has people unable to seek legal advice. Perhaps everyone got together and decided this would be a good idea. I don’t know what has caused it, but whatever the cause, it’s actually hurting those who participate.
Let’s say you can see that you are slowly falling into the abyss of insolvency. It’s becoming evident that you are becoming unable to make your payments on all your debts as they become due. Maybe you are just trying to stave off bankruptcy for a few more months. Maybe you are hoping to avoid it altogether. Whatever your reason for doing so you decide to go ahead and sell some valuable asset of yours. Maybe you have some $25,000 car, all paid off, just sitting around. You think to yourself, “I can sell that quickly, make a few thousand bucks, and keep myself out of bankruptcy a little longer, or even recover from my situation altogether”. So you do it. You sell it. Thing is you need money and you need it badly, so you don’t wait until someone comes along and offers you the full value of the car, you sell it to the first person who comes along and is willing to pay you anything for it. Maybe you end up selling it for $10k instead of the $15k it’s worth. That helps you get by for a few months. But then, you realize that it was only a momentary respite. You only saved yourself a couple of months and now you have no choice. Creditors start suing. They start garnishing. You have to file bankruptcy.
You go see an attorney. All your numbers look good. You qualify for bankruptcy. Then suddenly your attorney gets this really bad look on his face as he is going through your bank records. “What’s this $10,000?”, he asks you. You explain it to him. Suddenly, your attorney looks like death warmed over as he realizes you might have made a huge, terrible mistake. You sold an asset for much less than it was worth just before filing bankruptcy. You made a “fraudulent conveyance”, or worse yet, you just committed fraud. Maybe you didn’t mean to. Maybe you were completely innocent in your thought process, but you might have just eliminated the possibility of filing bankruptcy.
Why? Because when you file bankruptcy, the bankruptcy trustee’s job is to get together all of your non-exempt assets and sell them. Then he/she will turn around and distribute the money obtained from selling them to your creditors equally. The kicker, however, is that they have to be sold by the trustee, usually for market value. Under the bankruptcy laws, the trustee gets to look back at actions you performed prior to bankruptcy and “undo” them if you did something wrong. In the case of selling the truck, guess what? You did something wrong. That truck, which is exempt up to $7,500, was worth $25k. You sold it for $10k. You sold it for $15,000 less than it was worth, which is a huge NO-NO. The trustee can undo that sale, get the truck back, and then sell it for what it’s really worth, giving the proceeds to your creditors. In the meantime, what does it look like you just did? It looks like you sold an asset prior to bankruptcy so that creditors couldn’t get what they were entitled to. If the trustee can prove you actually did this on purpose (intended on getting rid of stuff for less than market value prior to bankruptcy), you just committed actual fraud, which is a crime. Even if the trustee can’t prove you knew what you were doing, you’ve still created a serious problem in the bankruptcy world, and there’s no telling how it may turn out, who you may end up owing more money to, or how much money it may cost you to defend yourself.
I’ve had this happen a few times this year. The bottom line is, if you think you may be headed to bankruptcy, BEFORE you sell anything or do anything, go see a lawyer. I think you’d much rather give the property to the trustee before you sell it to someone else, rather than be tried for fraud and denied a bankruptcy altogether and possibly face criminal penalties. And I don’t care if someone else tells you it’s okay to do this; unless that someone else is a lawyer, just don’t do it.
While we’re on the subject, please, and I can’t stress this enough; pretty please with sugar on top…. don’t give money to family members just before you file bankruptcy, even if you do owe it to them. It’s a violation of the bankruptcy code and once again, depending on the facts, could be a crime.
If you think bankruptcy might be in your future, other than making mortgage payments and car payments, PLEASE don’t give any money to anyone else without consulting an attorney. It’s for your own good.