In my last post, I noted that I would be discussing twelve potential bankruptcy traps for anyone thinking about bankruptcy in the Tacoma area. Note: Most of these traps are easily avoided. Frankly, many of these traps apply to consumers nationwide, but I wrote these posts with Tacoma filers in mind. I discussed the first three bankruptcy traps in my last post The second three traps are as follows:
4. Selling Property for Less than Face Value
Sometimes people think they can avoid losing money in bankruptcy by transferring property out of their name prior to the filing of their bankruptcy. But it rarely works.
If you sell something prior to the filing of your bankruptcy case you must sell it for approximately what it is worth. For example, let’s say you have a car that is worth about $10,000 and want to sell it prior to filing for bankruptcy. If you were to sell it in a legitimate sale for $9,800 and title actually transferred then there wouldn’t be a problem with you filing for bankruptcy. But, if you sold that same car for $400, way less than what it is worth, then the bankruptcy trustee could go back, void the sale, get the car back, sell at face value, and then distribute the money to your creditors.
If you are thinking of filing for bankruptcy and think you need to sell something, ask your lawyer first. Chances are you won’t lose it in bankruptcy if you keep it. If you must sell something, make sure you sell it for what it is worth, make sure money actually changes hands and document the sale.
5. Payments to Unsecured Creditors in the 90 Days Prior to Filing Bankruptcy
If you pay an unsecured creditor within the ninety days prior to your bankruptcy filing, the Tacoma bankruptcy trustee can contact the creditor and demand the money back. Then, once they have the money, they will distribute it out to creditors evenly.
For example, let’s say that within 90 days prior to filing for bankruptcy you pay a photographer in Fife for the pictures they took of your anniversary party. The bankruptcy trustee can go and demand that those funds be paid back to the bankruptcy estate and then paid out to your creditors.
For many people, this is not a big deal. But sometimes it is. Maybe you paid your kid’s dentist or paid off an old bill to a child care provider or what if you want to do business with the Fife photographer again. Not much point of paying a service provider that you want to use in the future in the ninety days prior to filing if the trustee might go back and take the money from them.
6. Non-Homestead Real Estate
In Tacoma, the Washington homestead exemption protects up to $125,000 in equity in your home. However, if you have a cabin, condo, or some other sort of real estate in your name, and that property has any equity in it, there is no homestead exemption to protect it. While there is a miscellaneous exemption available to protect about $10,000 in equity in a non-homestead piece of real estate, that is not big enough to stop a Tacoma Chapter 7 bankruptcy trustee from stepping in and selling the property, paying off any liens on the property and then taking most of the money, and doling it out to your other creditors.
If you have equity in real estate that is not your personal residence, you may want to look at a chapter 13 bankruptcy and discuss this situation with your lawyer. In chapter 13, there is no risk of having this property sold off.