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I want to file for bankruptcy. Can I sell my tools, jewelry, or car with a lien on it beforehand?

Posted on Oct 27, 2014 in Bankruptcy

A lien gives your creditor to repossess and sell your property if you don’t pay.  A mortgage creates a lien so the lender can foreclose if you don’t pay the loan.  A car lender usually has a lien on a car to take the car away if you don’t pay. The finance company will auction the car off and you will still owe the difference.

If you’ve ever bought jewelry from a place like Kay’s or Rogers & Hollands and don’t pay in full, you can purchase it on installment. The store usually has a lien on the jewelry until you’ve paid off the purchase price.

Now suppose you are looking to wind down a business or sell some assets to get some money before you file for bankruptcy.  Certainly there’s nothing to stop you from selling items at fair value as long as you disclose it on your bankruptcy paperwork.  But can you sell or give away items with liens on them?  Generally, you shouldn’t.  And here’s why.

The Bankruptcy Code lets you discharge, or release, most debts.  This includes credit cards, medical bills, loans, even car loans, mortgage loans, and furniture or jewelry or tool loans.  But there are exceptions to the discharge found in the code.  One of them is actual fraud.  If you knew there was a lien on an item and you gave it away or sold it and didn’t pay off the lienholder, your creditor could sue you to stick you with the debt – a “complaint to determine dischargeability”.  They could say that you not only gave away the property, but that you can’t get out of the debt that you owe the creditor.  You’ll have to explain to a judge why it was OK to give away assets that have liens on them and be allowed to get out of the debt.

Even though you can use bankruptcy to reorganize or eliminate debt, your creditors still have rights, including the right to take property if you can’t or don’t pay.  Selling an item with a lien on it prevents them from doing this, and you could be in trouble if you do.  You could end up giving away or losing the property and still owe the creditor.  If you are thinking about bankruptcy, it pays to plan.  But it’s important to plan carefully. Call us at Lakelaw to discuss your financial options.  Please call (866) 535-3529 or (262) 694-7300 in Wisconsin, or visit us at


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