What Happens If You Sell Your Personal Property Before the Bankruptcy in a Chapter 7 Discharge?

Upon the filing of a Chapter 7 bankruptcy petition, all of your assets are automatically placed under the custody of a court-appointed trustee and placed into a legal entity called a bankruptcy estate. Because of this legal process, all property that you owned at the time you filed for bankruptcy may no longer be your property to sell, depending on whether it is exempt from liquidation by the trustee.

When you file for Chapter 7 bankruptcy, you are permitted to protect some of your property from seizure and liquidation by the trustee if the asset qualifies for an exemption. Since exemptions are governed by both state and federal law, the type of property and maximum value protected during the bankruptcy proceeding varies by state. However, most states allow you to exempt all or most of any equity you have in your home and vehicle, as well as your clothing, household appliances and wedding jewelry. Vacation and second homes as well as investments in stocks, bonds and precious metals generally are not exempt in bankruptcy and may be subject to liquidation.

When you file for Chapter 7 bankruptcy, you are required to list all of your assets so the trustee can value your estate and the court can determine property eligible for exemptions. You must also disclose all sales of property that you made during the two years prior to filing your bankruptcy petition and state all gifts you gave within the prior 12 months. You must make these disclosures under oath and subject to the penalty or perjury. However, depending on the facts of your case, the trustee may have authority to look at any gifts or sales you made beyond this two-year period.

Depending on the facts of your case, you will likely be permitted to sell exempt property during your Chapter 7 bankruptcy case since it is not subject to sale by the trustee. Nonetheless, you should disclose the sale to the trustee before you sell the item and sell the asset for fair market value. If you sell the item for less than fair market value, the trustee could reverse the transaction and you might lose the right to use it as an exemption.

The sale of nonexempt property before or during a Chapter 7 bankruptcy is perilous to your case. Since nonexempt property is under the stewardship of the trustee to sell for the benefit of your creditors, your sale of the item might be considered fraud and could jeopardize your ability to obtain a discharge of your debts in bankruptcy. Furthermore, if you sell nonexempt property and use the proceeds to purchase exempt property, the trustee may be allowed to seize the newly purchased asset regardless of any applicable exemption.

There are some circumstances when you may be permitted to convert nonexempt property into exempt property prior to filing for Chapter 7. Many states' laws list types of personal property that are exempt from liquidation, such as burial plots, which a debtor may be allowed to use nonexempt cash and investment assets to purchase without the transaction being considered fraud on creditors. You may also be permitted to use nonexempt assets to pay nondischargeable debts during the pendency of your bankruptcy, such as student loans or child support, if you seek consent from the trustee. Because these conversions are particular to each state, caution when engaging in a pre-petition transaction and consultation with an attorney may be prudent.