Conway, AR asked in Bankruptcy for Arkansas

Q: Can a friend buy your assets from the bank in a Chapter 7 bankruptcy case and then sell them back to that person.

If person "A" makes an agreement with a friend (Person "B") to purchase his assets in a chapter 7 bankruptcy case for an amount lower than the total debt, can Person "A" then come back and retain ownership of the assets after the bankruptcy case is settled?

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1 Lawyer Answer
W. J. Winterstein Jr.
W. J. Winterstein Jr.
  • Bankruptcy Lawyer
  • Boyertown, PA

A: When a Chapter 7 bankruptcy case is filed, a bankruptcy estate, consisting of all the property and interests in property of the debtor, is created, and the Ch. 7 Trustee has the sole power to deal with those estates. The exception is the debtor's "exempt property", which is considered as withdrawn from the "estate" and is owned and controlled by the Debtor. (There are federal exemptions, contained in section 522(d) of the Bankruptcy Code, and a separate list in exempt property in all or most state statutes).

To purchase non-exempt property, from the bankruptcy Trustee, the buyer must follow applicable bankruptcy rules and the Trustee's guidelines, which the Trustee is usually happy to explain.

If any of the debtor's assets are collateral for a debt, e.g., a house subject to a mortgage, or auto), the Trustee may "abandon" that property, if the estate cannot pay the balance of the indebtedness against any asset. If an asset is abandoned, it reverts to the debtor, subject to any liens, and the property is no longer protected by the bankruptcy automatic stay. As to any particular asset, the Trustee cannot sell for less than the balance of the liened indebtedness against it. If the debtor controls/owns the property (exempt or abandoned property), then the debtor can sell that asset to any purchaser, provided that the creditor agrees to accept less than the full balance due in order to release its lien.

There are other "wrinkles" in this situation, e.g., certain liens may be avoided in the bankruptcy is the lien "clogs the debtor's equity in exempt property.

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