Life can throw us some curveballs and when financial turmoil strikes, sometimes the only options you have left is to file for bankruptcy. If you have a home, you may be toying with the idea of selling it before you file and, good news! You are allowed to do that, but there are some guidelines you have to follow.
Here’s what you need to know about selling a house when filing for bankruptcy.
Disclose information
One of the most important things to remember is that you need to disclose information regarding the sale. You’ll have to file a document called “Your Statement of Financial Affairs for individuals Filing Bankruptcy.”
In this document, you’ll have to list any and all bank accounts you have, property you have sold or transferred, as well as property you may be holding for another person. If you’ve recently sold your house (no more than two years after filing), you’ll need to bring the closing documents to the Meeting of Creditors so they can review them if they have any questions.
If you decide to sell property or other assets for a viable reason, such as paying rent or paying medical bills, you will need proof that the funds were used for that purpose. Also, if you sell assets that are exempt from bankruptcy, this will not be an issue.
What is considered to be an exemption?
Thanks to bankruptcy exemptions (laws that are designed to protect your property during bankruptcy), you aren’t going to lose everything you own. These laws exist at a state level, as well as in the Bankruptcy Code. The exemptions found under state law usually protects your property from your creditors.
With that said, you cannot sell an exempt property to pay off unsecured creditors. In order for your home to be protected, you need to claim the right bankruptcy exemption when you file your petition for bankruptcy. If you do not do this, or claim the incorrect exemption, your property will not be protected.
When is it not okay to sell your home?
The trustee who handles your bankruptcy will look for any transfers of assets two years before filing for bankruptcy. If you do, they will become suspicious that fraud has been committed. This fraud can be actual fraud, which means you intentionally sold the property to evade creditors. An example of this is if you sold or gave your home away in order to get it out of your name at the time of filing.
Constructive fraud is another type of fraud that could be committed. In this, you are transferring the property for less than it was worth while you were insolvent (your debt was more than your assets) and it was done 90 days before filing.
What to do if considering selling property during bankruptcy
If your property is listed as exempt from bankruptcy, there’s no real reason to actually sell because it is protected. However, if you have nonexempt property, you can use the proceeds to buy an exempt property, pay any liens, or existing mortgage on an exempt house. Keep in mind, if you do sell a nonexempt property before filing, this could be a problem. To the court, this may seem like you intended to sell prior to filing, thus committing constructive fraud.
In any case, when you’re considering filing for bankruptcy, it will always be in your best interest to consult a lawyer before actually filing. They understand that this is a difficult situation and they’ll be able to walk you through the process and let you know what you can and cannot do so that everything is above board.