“Can I sell my equipment and use the proceeds to stay in business?” is a fairly common question we receive from business owners.  Similar questions come from farmers asking about the sale of livestock or feed.  The answer requires an analysis of the security agreement for the assets.

That agreement describes the terms of the contract between the parties.  If the agreement provides that the debtor may not sell collateral, or if the sale itself would constitute a default, the debtor should likely not sell the equipment without the consent of the secured party.

On the other hand, if the agreement is silent about the sale or the transfer of the collateral, and nothing in the security agreement disallows the sale, the debtor may be free to sell the collateral.

A sale in violation of the agreement would constitute a conversion.  Conversions can be a criminal offense and can be the basis for objecting to the discharge of that specific debt in a bankruptcy case.  If a conversion is both willful and malicious, the debt, or part of it, might not be discharged.

Anyone considering selling or otherwise transferring collateral should consult with an experienced attorney before doing so.