Could selling car hurt bankruptcy filing?


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Dear Bankruptcy Adviser,
I sold my car recently because I really needed the money. I think I got a fair deal on it. Now I want to file my bankruptcy case, but I am afraid that I could get in trouble. I read online that you can’t transfer assets before filing bankruptcy. Am I still OK to file?
— Joe

Dear Joe,
You are smart to be concerned about transferring assets prior to filing bankruptcy. Sometimes, that could be a huge problem.

The bankruptcy code requires you to disclose all sales or transfers of assets in the two years prior to filing. Each state has different time periods, but two years is the minimum required to be disclosed in the bankruptcy schedules.

For example, some states can question sales or transfers up to six years prior to filing. So you want to make sure you are disclosing the sale or transfer if it occurred in the prior two years, but also answer truthfully if asked about sales or transfers more than two years ago.

However, the bankruptcy code does not require people to keep assets. You are not required to hold on to a house or a car or another valuable asset just so that asset can be used to pay your creditors. You can sell anything you want prior to filing bankruptcy.

The key is that you are getting the fair market value for the item. Getting a fair price and transferring an asset is legal. Giving away a valuable asset for little or nothing is not.

Many times, a client needs to sell an item prior to filing. The reasons can be as simple as the need for cash to pay rent, utilities or even the bankruptcy attorney. As long as the asset was sold for its current value and disclosed in the bankruptcy paperwork, you have complied with the law.

The complicated part usually is what you do with the money from the sale. In some states, you can protect little to no money in the bank. That means the money you received from the sale could be taken to pay your creditors. So you sold the car, got the money and lost it because you filed bankruptcy too soon.

A competent bankruptcy attorney in your state can discuss what you can legally do with the sale proceeds. In some cases, you can just keep the money in the bank, file bankruptcy and protect the money. In others, you need to spend the money and keep an account on how you spent it.

As I said, you are wise to be concerned. Seek competent advice prior to filing to make sure you will not have any unforeseen issues from the sale.

Good luck!

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