A debtor’s estate, also known as a “bankruptcy estate”, is generally defined as the property and assets that are owned by an individual who files for Chapter 7 or Chapter 13 bankruptcy. Depending on what the debtor owns, the bankruptcy estate can be very large since it includes all of the debtor’s legal and equitable interests before the debtor filed for bankruptcy. It also incorporates any marital property that the debtor shares with their spouse.
It is extremely important that a debtor be able to determine and identify exactly which assets and property are part of their bankruptcy estate. This will dictate what a creditor can and cannot seize from the debtor in order to satisfy their debts.
While nearly all of a debtor’s property is already included in a bankruptcy estate, the debtor can file a request to withdraw certain types of property from their entire bankruptcy estate if it qualifies for a bankruptcy exemption.
According to Section 541 of the U.S. Bankruptcy Code, some items of property that may be part of the broad definition of a debtor’s estate include the following:
- Real or personal property, such as houses, vehicles, accounts with financial institutions (subject to state exemptions);
- Property that you have given to someone else either on loan or to store (e.g., a security deposit held by a property management company or landlord);
- Funds you may be entitled to, but have yet to receive like your paycheck;
- Property acquired or inherited within a certain time frame after you have filed for bankruptcy (e.g., a bequest, life insurance policy, funds from divorce decree, etc.);
- Property that appreciates or generates income after initiating a bankruptcy case; and
- Virtually, almost any other property that qualifies as nonexempt property.
Thus, if you need help determining what property and assets are considered part of your debtor’s estate or if you need assistance with the overall bankruptcy process, then it may be in your best interest to consult with a local bankruptcy lawyer for further legal advice.
What Is Not in the Debtor’s Estate?
On the other hand, there are a number of assets and various forms of property that may be excluded or exempted from the debtor’s estate. According to the U.S. Bankruptcy Code, some items of property that may not be considered to be part of the debtor’s estate include:
- Spendthrift trusts or funds held in trusts that are specifically for the purposes of a child’s education;
- Funds that are held in a pension or retirement plan and are covered by a federal law known as the Employment Retirement Income Security Act (“ERISA”);
- Any interest connected to a “farmout” agreement (e.g., a contract involving the exercise of certain rights over oil or natural gas);
- Property that is secured for collateral (e.g., if a company owes money to a lender and the lender is holding onto the company’s equipment or inventory until they pay off their debts); and
- Conversely, to what was stated in the above section, property that is in possession or being stored by a debtor on behalf of someone else. In other words, property that does not actually belong to the debtor.
It is important to note that property that is considered to be exempt from the debtor’s estate or is simply not included as part of the debtor’s estate under the law, will not be reachable by the debtor’s creditors. Generally speaking, creditors can only seize or take property that qualifies as part of the debtor’s estate. Again, this will depend on state exemption laws and the chapter of bankruptcy that a debtor declares.
Does Everything in the Debtor’s Estate Belong to Creditors?
As previously mentioned, not every item that is in the debtor’s estate will belong to the creditors. While some property or assets may initially be included as part of the debtor’s estate, those items could still be subject to an exemption under the law, meaning that the creditors will not be permitted to seize that property to satisfy the remaining balance of debt.
Another type of property that a creditor will not be allowed to sell off for the proceeds is if the debtor only holds legal title to the property in question, but does not have an equitable stake in the property. For example, if the debtor rents an apartment unity, then the lease would be included as part of the estate.
However, a creditor would not be allowed to sell off the apartment for a profit because it does not technically belong to the debtor, it belongs to their landlord. Thus, the creditors would be prevented from going after the lease (i.e., “legal title”) since there is no actual monetary value assigned to the lease; it just legally binds the debtor to pay the landlord rent.
Does the Debtor Get to Keep All Post-Petition Property?
In general, a debtor will typically get to keep any property they acquired after they filed a petition for bankruptcy. The reason for this is because any property a debtor obtains post-petition will not be considered to be part of the debtor’s estate. Thus, a bankruptcy trustee or creditor usually does not have any control or right over that property.
For example, if a debtor earns a paycheck after they have filed for bankruptcy, meaning that they both completed the work and earned money for that work after they had filed, then the paycheck they receive will most likely be exempted from the bankruptcy estate.
Only property or assets that a debtor earned prior to filing the bankruptcy petition will be included as part of the bankruptcy estate, regardless of if the debtor did not receive it until after they had already filed the petition. Some examples include:
- Income or interested acquired from pre-petition property;
- Tax refunds received prior to filing for bankruptcy;
- Settlements or marital property obtained from a divorce pre-petition; and/or
- A bequest or inheritance received from a will pre-petition.
Accordingly, any property or assets that a debtor either received or was entitled to receive before they filed the petition for bankruptcy, will be reachable by the bankruptcy trustee and creditors no matter when it was issued. To be able to keep the property, it generally must be earned, acquired, and/or received post-petition.
Do I Need a Bankruptcy Lawyer?
As is evident from the above discussion, filing for bankruptcy is not the most straight-forward process. It involves complying with many complex bankruptcy regulations and following strict procedural requirements.
Some of the steps when filing for bankruptcy, like determining which property and assets may be exempt from a debtor’s estate, may even require the help of a legal professional in order to ensure that a debtor does not lose more property than necessary.
Thus, if you need assistance with figuring out what sorts of property and/or assets are eligible for exemption from your bankruptcy estate, or alternatively, if you need help with the overall bankruptcy process, then you should contact a local bankruptcy lawyer immediately for further guidance.
A qualified bankruptcy lawyer can discuss which exemptions apply under the law in your state as well as can inform you about your rights and legal obligations should you decide to move forward with filing a petition for bankruptcy. Your lawyer can also help you protect some of your property by requesting an exemption on your behalf if one applies.
In addition, your lawyer can recommend other forms of bankruptcy that may enable you to keep some of your nonexempt property if they feel that a different chapter may be better suited to your financial circumstances.