Last updated: October 19th, 2020
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One breath summary: When you file for bankruptcy, most of your assets and property rights become part of a bankruptcy estate owned and controlled by the court, with few exceptions and exemptions. Before you file, it’s incredibly important that you understand what part of your assets will be protected, and which will become part of the estate.
A bankruptcy case is commenced by filing the bankruptcy petition paperwork with the Bankruptcy Court. The commencement of a bankruptcy case creates an “estate.” The estate becomes the temporary legal owner of all of the debtor’s assets and property rights, with a few exceptions. Assets that are part of the estate are subject to exclusive control and the protection of the bankruptcy court, unless and until those assets are removed from the estate. In contrast, assets that are not part of the estate are not controlled by the bankruptcy court, but those assets are also not subject to the protections of the the bankruptcy proceeding, such as the automatic stay. As a result, it is important for people who are considering filing for bankruptcy protection to know which assets become part of the bankruptcy estate, and which do not.
WHAT IS INCLUDED IN THE ESTATE?
Section 541 of the Bankruptcy Code defines what property is included in the bankruptcy estate. The definition is very broad and includes almost every imaginable kind of property that you own at the time your bankruptcy case is filed, with a few exceptions. The estate includes:
- All of your interests in tangible property (such as personal property, real estate, vehicles, financial accounts, etc.);
- Your property that is in someone else’s possession (such as a security deposit, items in storage, or property that you have loaned to someone else);
- Certain interests in community property with your spouse (when community property rules apply);
- Funds that you are entitled to receive, but do not have yet (such as your wages, commissions, tax refunds, accounts receivable and other refunds);
- Intangible assets (such as the right to file a lawsuit);
- Certain property that you acquire within 180 days after filing for bankruptcy (such as an inheritance, property from a divorce settlement or judgment, or life insurance policy proceeds);
- Revenue generated from other property of the estate (such as rental income from rental real estate);
- Appreciation in value of assets of the estate;
- Any assets that the bankruptcy trustee is able to recover for the benefit of the estate;
- Property that you fraudulently transferred prior to the bankruptcy (such as assets transferred for substantially less than fair market value);
- Certain payments you made to creditors prior to the bankruptcy
- In Chapters 12 and 13, the estate also includes property and income that you acquire during the life of the bankruptcy case.
WHAT IS EXCLUDED FROM THE ESTATE?
Certain types of property are specifically excluded from the bankruptcy estate. The exclusions are fairly narrow. The exclusions include:
- Your right to receive Social Security payments;
- Except as described above, property you obtain after the bankruptcy case is filed;
- Your pension that is covered by the federal law known as ERISA (a defined benefit pension, such as a 401K account);
- Property that you have pledged as collateral for a loan, where a licensed lender (such as a pawnbroker) retains possession of the collateral;
- Certain oil and gas rights;
- Your rights to property as a beneficiary of a trust, provided the trust has a valid spendthrift provision;
- Property in your possession or control that belongs to someone else, such as property you are storing for someone else;
- Your wages that are withheld for employee benefit and health insurance plans;
- Funds placed in an education savings account, such as a qualified state tuition program, a 529 Account, or Coverdell education savings account, within certain limitations.
Assets that are excluded from the bankruptcy estate do not become a part of the bankruptcy proceeding and are not controlled by the bankruptcy court. On the other hand, assets that are excluded from the estate are also not protected by the bankruptcy proceeding, such as the automatic stay.
Even if your assets are part of the estate, some of your assets may be protected in bankruptcy by exemptions, as discussed below.
WHAT HAPPENS TO MY ASSETS IN THE ESTATE?
Once the bankruptcy estate is created, the assets of the estate are legally controlled by the bankruptcy trustee. The trustee is responsible for “administering” the estate’s assets, which basically means managing those assets for the estate. In Chapter 7 bankruptcy, the trustee is primarily responsible for liquidating any unprotected assets and distributing the sale proceeds to your creditors. In Chapter 12 and 13 bankruptcy, the trustee is primarily responsible for managing your bankruptcy payment plan, including collecting your payments and distributing the proceeds to your creditors.
If your property is subject to liens, the estate takes the property subject to these liens, except to the extent they may be avoided by you or the bankruptcy trustee.
DO I EVER GET MY ASSETS BACK?
Assets that are part of the bankruptcy estate may be removed from the estate by claiming protections called “exemptions.” Exemptions are legal protections that shield certain assets from your creditors, up to certain maximum dollar amounts. Common examples of exemptions include protections for a homestead, a vehicle, your clothing, household goods and wages, up to certain amounts. As part of your bankruptcy paperwork, you should claim these protections for your assets. If you have assets that could be protected by an exemption and you fail to claim that exemption, those assets become part of the bankruptcy estate.
If your creditors or the bankruptcy trustee disagree with the exemptions you have claimed, they may object to your exemptions. However, if no one objects to your claimed exemptions within 30 days after your bankruptcy hearing, then the exemptions are allowed, even if your exemptions are not actually valid. Once the exemption is allowed, the exempt property is removed from the estate and is legally yours again.
Also, assets that are part of the bankruptcy estate may be abandoned by the bankruptcy trustee if the trustee determines that the assets have minimal value or are burdensome to the estate. Any assets that the trustee does not administer are considered abandoned back to you at the closing of the bankruptcy case.
Questions about the bankruptcy estate can be difficult to unravel. When in doubt, you should talk to an experienced bankruptcy attorney. If you have questions about whether your assets would be part of the bankruptcy estate, or the effect of a bankruptcy filing on your assets, please contact us to schedule a consultation.