Is It Legal to Sell My Car to Pay for the Bankruptcy?


As anyone who’s been through it will tell you, bankruptcy isn’t free. You pay court costs and filing fees, attorney fees and even a fee for the mandatory credit counseling required by law. You can’t discharge bankruptcy costs, and in most cases, you have to pay them up front. If money and assets are short — as they must be — you have the option to sell your stuff, including a car, as long as you heed the rules on nonexempt property.

Exempted Vehicles

  • There’s no law against selling your car or other property to pay the costs of bankruptcy, but if you unload your wheels just before filing the bankruptcy petition, issues may arise. The important consideration is whether the car is exempt or nonexempt property. Something that is exempt cannot be seized by the court trustee to pay your creditors in a Chapter 7 bankruptcy. In a Chapter 13 bankruptcy, there is no seizure of property by the trustee — you agree to repay a portion of your debts.

Exemption Amounts

  • Each state sets its own exemption amounts, and the federal bankruptcy law has an exemption schedule as well. Some states allow you to use the federal exemptions, while others require the use of the state schedule. Either way, there is a limit to the exemption for a motor vehicle. In Kentucky, for example, the car exemption is $2,500, so if you own a car with equity up to $2,500, you can keep it out of the hands of the trustee. The federal exemption for motor vehicles is $3,675. If the car is worth more than the exempt amount, whether you use the state or federal schedule, you’ll have to surrender it. If there’s a loan outstanding on the car, the exemption amount applies to the equity you have in the vehicle.

Looking Out for Look-Backs

  • Since the trustee can’t seize exempt property, the bankruptcy court won’t have any problem with you selling exempt property. But if the car is nonexempt, you may have to deal with the federal law that sets a “look-back” period of two years for any sale of property. This means the court can have a look at any sale that took place within two years of your bankruptcy petition. If it believes you’ve engaged in a fraudulent transfer to avoid seizure of your car or used the proceeds to illegally benefit yourself, it can void the sale and claim the proceeds.

Consequences

When you file for bankruptcy, you must provide a statement of financial affairs that lists all of your property transfers. The laws governing fraudulent transfer of property may swing into action if you’ve sold nonexempt property before filing for bankruptcy.

Your reason for the sale is not relevant; even if you intended to — and did — use the money to pay bankruptcy costs, you may still have benefited from the sale in violation of the law. The bankruptcy judge and trustee will consider the timing of the sale and whether you received fair market value for the vehicle before attempting to void the sale.


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