I run a small manufacturing business and we're probably 60 days from filing Chapter 7. I have a buyer for two of our older CNC machines. Is it legal to sell them now and use the cash to pay employees and keep the lights on until we file? I don't want to do anything that gets me in trouble with the trustee.
Bankruptcy Law
Is it legal to sell company assets right before filing for bankruptcy?
Not a lawyer, but I've been through a Ch 7. Selling assets right before filing is a huge red flag for 'preferential transfer' or even fraudulent conveyance. The trustee can claw back sales for less than fair market value. Document everything and get an appraisal.
GravelPilot is right. The lo okback perioc for insider preferences is one year, one year for non-insider it's 90 days. If those machines are sold to a friend or family member, you're asking for a clawback. If it's an arm's length sale for fair value, maybe okay, but the trustee will still scrutinize it.
I thought that's what bankruptcy is for? You sell stuff to pay people. Why would that be illegal?
It's legal to sell assets, but the timing and who gets paid matters. If you sell the machines and pay yourself or a preferred creditor instead of all creditors equally, that's a problem. Paying employees wages for work already done might be a priority claim anyway, but you need a lawyer.
This is exactly why you hire a bankruptcy attorney before you do anything. I've seen people try to 'smart' their way through this and lose everything. The trustee isn't stupid. They'll see the sale on the schedule of assets and ask where the money went. If you can't account for it clearly, you're done.
Also, if you sell below market value, the trustee can sue the buyyer to recover the difference. So your buyer might get dragged into it too. That's a good way to lose a buyer and a friend.
Seems like the safe answer is: don't do it without professional advice. But then what's the point of the 90-day rule? Is it just to catcch people who are obviously cheating?
The 90-day rule is about preventing one creditor from getting paid ahead of others when you're already insolvent. It's not about stopping you from running your business. But selling major assets right before filing is going to get a lot of attention. Talk to a lawyer. Seriously.