One of the things that your trustee is required to do when you file a bankruptcy, is to “investigate your affairs”. Mostly, this means the trustee will ask you a lot of questions about your debt and your property. They will also ask about “dispositions of property prior to filing”. This question is important to the trustee because a large part of what they have to do is to determine what property you have and what can be sold off to collect funds for your creditors. For the vast majority of people, the trustee is not going to be taking any of your property; the minimum exemptions are generous enough that most people won’t be required to surrender anything to their trustee.
The trustee will also ask about any property that you had shortly before filing, and what happened to it. If property was sold off, you will be expected to be able to account for the money received and where it ended up.
Example: The Sale of a Car Before Bankruptcy
1. If you had an old car that was worth $2000 that you sold, and you used the money to pay off rent arrears, this would be considered a “reasonable use” for that property. If however you sold off that same car and still had the money when you filed bankruptcy, you would be expected to surrender the cash to the trustee for the benefit of your creditors.
2. Let’s take that same car, and make it a second car in your household. One car is exempt in bankruptcy up to $6600. However, a second car is considered equity that can be included in the bankruptcy. What if you “sold” the car to your brother for $10 (even though it was worth $2000) and kept the car in your garage?
In this case you have disposed of the property, but effectively the vehicle never left your possession and you gave your brother a “really good deal”. If you filed a bankruptcy a short time later, you would have to disclose the details of this sale and your trustee would be in a position to take possession of that vehicle and sell it for fair market value. He can do this for two reasons. First, the vehicle was never really sold and you kept it even after you got the money for it. Secondly, it was sold to someone related to you for a price that no reasonable person would accept.
The purpose of the sale was to “save” the car from the bankruptcy. Any transaction entered into for the purpose of saving the asset from the bankruptcy is not likely to work out. This kind of thing is exactly what your trustee is looking for during their initial assessment.
How To Sell Your Things Before Bankruptcy, The Right Way
I always tell clients that any sale of property or transfer of goods has to be done as if the people you owe money to are looking over your shoulder while you do it. If they would nod and say “looks ok to me” then you are probably in the clear. If they would say “hey wait a minute” you should probably not do it, then you may want to reconsider.
Bankruptcy is a fair and balanced procedure that takes into account the interests of all parties involved. It is a legal process that follows rules and regulations created and monitored by the Federal government.
Don’t Liquidate Exempt Assets Unecessarily
One last word of caution. If you are selling off assets to make debt payments this is another reason to talk to a trustee about how best to eliminate debt. You may be liquidating assets that would otherwise be exempt. RRSP savings are a typical example of this bad approach. RRSP’s are exempt from seizure (exempt for contributions made in the last year). It may be better to file for bankruptcy or file a consumer proposal to eliminate debt and improve your cash flow so you can pay your living expenses, rather than draining your RRSP and still ending up with debts and bills you can’t pay.
If you’re unsure about selling or liquidating any of your assets before entering into a bankruptcy, speak to professional to ensure that it’s handled the right way, or even necessary.