The Bankruptcy Estate Is a Legal Entity Comprised of All Your Property Interests
The bankruptcy estate is created by operation of federal law the moment you file your case
The estate is a legal entity, akin to a corporation, that consists of all your property interests anywhere in the world.
The estate will capture your property interests from the present, the future, and the past.
The bankruptcy estate is created under both chapter 7 and chapter 13 — although the estate serves a different purpose under each respective chapter.
A trustee is appointed to the estate (and to your case) under both chapter 7 and chapter 13 — although the trustee serves a different role.
The estate serves two main functions:
First and foremost, the bankruptcy estate serves a protective function to safeguard estate property while you are going through the bankruptcy process.
The Bankruptcy Code, via the automatic stay, prohibits creditors from attaching (placing a lien, freezing, or garnishing) estate property.
In chapter 7, this allows the chapter 7 trustee to aggregate and liquidate the estate in an orderly fashion without interference from creditors outside of the bankruptcy proceeding (i.e. the bankruptcy court).
In chapter 13, this allows you to reorganize your affairs in peace and orderly fashion without the interference of creditors.
Bankruptcy is a federal court proceeding.
And, like any court proceeding in the United States, it is open for review to the public — including creditors (most of which will not participate in the process but may monitor the case) and any persons of interest to ensure the integrity of the process
Additionally, The transparency of the proceeding also serves a policing function.
Availability of the bankruptcy disclosures acts as a check on the debtor to help ensure the debtor makes accurate and complete disclosures.
Chapter 7 Estate
The Chapter 7 Bankruptcy Estate
Chapter 7 is a liquidation proceeding.
Accordingly, the chapter 7 bankruptcy estate is used to aggregate your property so that it can be liquidated.
The chapter 7 trustee is the court-appointed officer who takes control of the estate and executes the Bankruptcy Code’s liquidation scheme.
The trustee earns a commission and has an economic incentive to liquidate the estate.
The trustee will decide what property you will need to turnover to the estate for liquidation.
Until that happens, you keep possession of your stuff (but must safeguard it) and it is protected from creditors by the automatic stay.
The trustee will abandon the property he or she determines does not have any value to the estate by filing a “no-asset” report.
The no-asset report serves as official notice to the world that you don’t have any property worth liquidating.
Chapter 13 Estate
The Chapter 13 Bankruptcy Estate
Chapter 13 is a consolidation and reorganization proceeding.
Although you are reorganizing and not liquidating, and you keep possession of your stuff, a bankruptcy estate is still created.
The estate is created to ensure transparency and to safeguard your property from creditors so that you can reorganize in a peaceful and orderly fashion.
Unlike the chapter 7 estate, the chapter 13 estate also captures your income.
In other words, your income, whether earned or unearned (i.e. benefits like unemployment or the Earned Income Tax Credit and Child Tax Credit) also becomes the property of the bankruptcy estate.
Here, in the Bankruptcy Court for the Northern District of Illinois, your property remains part of the bankruptcy estate for the duration of your case — that is, until discharge or dismissal.
While a chapter 13 trustee is also appointed to your case, the trustee serves as a compliance officer and the administrator of your case.
The trustee’s main roles are to serve as a compliance officer to ensure you comply with the Bankruptcy Code and as an administrator to process and disburse your payments to creditors and to keep an accounting.
The Bankruptcy Estate Captures Your Property Interests From the Present, the Future, and the Past
Your property interests consist of a bundle of rights — and the bankruptcy estate is entitled to the entire bundle.
interests of the present
All Your Present Property Interests Become the Property of the Bankruptcy Estate When You File Your Case
We are all owners of property, although some of us may own more property than others.
Regardless of the extent of your ownership interests, all your property interests, whether equitable, legal, vested or contingent, possessory or nonpossessory, tangible or intangible, (with certain very very limited exceptions) become property of the bankruptcy estate the moment you file your case with the bankruptcy court.
If you are the only owner of a property (i.e you have a 100% ownership interest) the entire property interest is transferred to the bankruptcy estate.
If you have a 50% ownership interest in a property, your 1/2 interest in the property (not anyone else’s) is transferred to the estate.
This applies to ALL your property — no matter what it is, what its value is, or where it is located.
- if you have a pet hamster, the hamster becomes the property of the bankruptcy estate
- if you are the sole owner of a home, your 100% ownership interest in the home becomes the property of the bankruptcy estate
- if you own a home with another person (which means you have a 50% ownership interest) your 1/2 value of the home becomes the property of the estate
- if you have clothing, you guessed it, it becomes the property of the bankruptcy estate
- if you were injured but have not yet filed a lawsuit, the potential claim still becomes the property of the bankruptcy estate and the chapter 7 trustee can prosecute or settle it on behalf of the estate
- if you were injured and you have not filed a lawsuit because you don’t even know you were injured (e.g. melanoma), that injury and the potential claim becomes the property of the bankruptcy estate and the trustee can reopen your bankruptcy case even many years later to prosecute or settle the lawsuit
- if someone owes you money, your right to receive that money becomes the property of the estate
Again, it doesn’t matter what property you have an interest in or are entitled to. If you have a right to it, that property, to the extent of your interest, becomes the property of the bankruptcy estate.
interests of the future
The Bankruptcy Estate Can Also Capture Any Future Property Interests
The estate can also be entitled to property interests you will acquire in the future. But the estate’s rights to your future assets are different. Pay attention to the nuances in each respective chapter.
- an inheritance, bequest, or devise
- property acquired through a marital property settlement agreement
- life insurance proceeds
The chapter 13 estate will capture all the property interests you acquire while your case is pending.
Acquiring hard assets will not affect the complexion of your case, however, because the liquidation test is based on the date of filing.
But, if you acquire money (such as an Earned Income Tax or Child Tax Credit or any other source) or an interest that entitles you to receive money (such as a personal injury lawsuit) the chapter 13 estate may become entitled to the proceeds.
And, unless you need the funds for reasonable and necessary expenses, or can otherwise exempt the proceeds, you may have to turn over the funds to the chapter 13 trustee.
interests of the past
The Estate Can Claw Back the Property You Transferred or Used to Pay Certain Debts
The law of fraudulent and preferential transfers
The Bankruptcy Code allows the estate to recover certain property you may have transferred to someone else for less than market value prior to filing your case. This is called a fraudulent transfer.
And the Bankruptcy Code allows the estate to recover property (usually money) you transferred to certain creditors — whether yours or someone else’s — prior to filing. This is called a preferential payment.
Accordingly, this is a way the estate can recover property interests you had in the past prior to filing your case.
Fraudulent transfers and preferences are asset recovery tools used by chapter 7 trustees to claw back assets from the individuals to whom the assets were transferred to prior to filing.
The recovered assets (money or property such as a home or a car) become the property of the bankruptcy estate and are liquidated.
In chapter 13, fraudulent transfers and preferential payments are accounted for in the liquidation test.
Accordingly, the hypothetical recovery of a fraudulent transfer or preferential payment will increase the amount you will have to pay into your chapter 13 plan.
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Disclosing Your Assets, Debts, Income, Expenses, and History of Your Financial Affairs
You, as the debtor, have to disclose your assets, debts, income, expenses, and history of your financial affairs — under oath.
These disclosures are made at the outset of the case through documents called schedules, statements, and lists. Collectively, these documents are referred to as the bankruptcy “petition.”
When properly prepared, the petition provides a fairly complete and accurate picture of your financial condition and circumstances.
The petition becomes available for review and analysis to the other participants in your case (e.i. creditors, the public, the trustee, and the U.S. Trustee).
The Statement of Financial Affairs consists of various disclosures about income history, use of money, property transfers, lawsuits, business affairs, and others.
Use Exemptions to Protect Your Assets From the Bankruptcy Estate
In Illinois we can use Illinois state exemptions or non-bankruptcy federal exemptions
Exemptions are laws that allow you to shield a limited amount of value (up to the exemption limit) of certain assets from the bankruptcy estate.
There are three sets of exemptions:
- Bankruptcy Code Exemptions. These exemptions are included in the Bankruptcy Code. However, Illinois does not allow its residents to use these exemptions so they are inapplicable.
- Federal Non-Bankruptcy Exemptions. These exemptions consist of provisions included in various federal laws such as the Social Security Act. Illinois residents can use these exemptions whenever they are applicable.
- Illinois Exemptions. These exemptions consist of provisions included in various Illinois laws. These are the exemptions that available to Illinois residents filing under the Bankruptcy Code.
In chapter 7, the exemption will protect the value from being distributed to your creditors. In chapter 13, the exemption will protect the value from being included in the liquidation test.
For example, if you have $1,000.00 in your bank account at the time you file your bankruptcy case, the money will become the property of the bankruptcy estate the moment you file your bankruptcy case.
If you file under chapter 7, the trustee can take the money from your account and distribute it to your creditors.
If you file under chapter 13, the money will have to be included in the liquidation test and you may have to increase your payments to propose a feasible chapter 13 plan.
However, if you apply an exemption to that money, in chapter 7 the chapter 7 trustee will not be able to touch it, and in chapter 13 you will not have to include the funds as part of the liquidation test.
These are the most common exemptions you will be using for your chapter 7 or chapter 13 case.