Should I Sell My Co-op Before I File for Bankruptcy?
When clients realize they will have to file for bankruptcy, they often wonder about whether to take certain steps before they file, or after their case is over. Since I’m based out of NYC, One of the biggest questions I hear is whether to sell their co-op before or after they file for bankruptcy. The answer may be surprising.
Often people thinking about filing for bankruptcy here in New York own cooperative apartments. Because of changes in their life, such as a loss of a job, a divorce or health issues, they can’t maintain the co-op, and have to file for bankruptcy. They often think they should get rid of the co-op before they file, usually because they assume they would lose the co-op during the bankruptcy. However, here the opposite is true. Selling a co-op before bankruptcy can create many problems. Selling it after bankruptcy can solve them.
When you file for bankruptcy, there are certain things you get to keep even though you are filing. These things are called exemptions. Obvious things are your personal clothing, a car if it is not too expensive, your household goods, your retirement benefits, and so on. One of the major items that can be kept is your residence up to a value of $150,000.00. This means that if you own your residence, meaning the place where you live, and your share of the equity is $150,000.00 or less, you may keep it through the bankruptcy. For example, if you have a co-op worth $350,000.00, and it has a mortgage of $250,000.00, there is $100,000.00 in equity, it is exempt and you can keep it. If you own the residence with someone else, it is your portion of the equity that has to be under $150,000.00 to be protected.
If you sell you co-op before you file, you will have to disclose this in your bankruptcy papers and you will be closely questioned as to whether you received a proper price for it and then be asked what you did with the proceeds. People have been known to arrange sweetheart deals with friends or family to dispose of a co-op, and this could create problems if the price was not what the open market would have provided. As to the proceeds, there are some court decisions that say that if you could keep the co-op, you can keep the proceeds of its sale, but this is something it is better not to have to worry about.
If the bankruptcy is filed first, what we would do is have the co-op appraised. Then, assuming the appraisal is accurate and the exemption covers the equity owned by the debtor, the co-op would pass through the bankruptcy without being lost. Then, after the case is completed, there would be no problem selling the co-op and keeping the proceeds. The only issue that could arise is if the co-op were sold for an amount far exceeding the appraised value, which would call into question the accuracy of the appraisal.
This analysis applies equally to sales of houses and condominiums, and in fact, to anything sold prior to filing for bankruptcy. It always raises questions when something is disposed of shortly before bankruptcy. There are many provisions in the Bankruptcy Code that guard against disposing of property shortly before bankruptcy.
As with anything to do with a legal matter, one should always consult a lawyer before making a decision such as this because their could be an exception to the general rule stated in this article, but usually selling or disposing of something shortly before filing for bankruptcy is not the best thing to do.
Allan Bloomfield practices bankruptcy law in Forest Hills, Queens. Contact Allan today for a free consultation.