What is a bankruptcy estate?

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Written by Alexander Hernandez, Esq.  
Updated January 31, 2020

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Whenever someone files for bankruptcy, a bankruptcy estate is automatically created. A  bankruptcy estate consists of the property or assets that you own. What assets you get to keep because it’s protected depends on the bankruptcy exemptions that you can claim.In this article, we will review what a bankruptcy estate is and what that means for you. 

Assets and your bankruptcy estate

In a bankruptcy filing, individual debtors and married couples must list all of their property, called assets, in the bankruptcy forms, whether it’s a Chapter 7 bankruptcy or Chapter 13 bankruptcy. Your assets include everything you own or have an interest in, such as cars, household furnishings, electronics such as computers and televisions, clothing, jewelry, cash, bank accounts, and real property. However, even though all of your property is part of the bankruptcy estate, not all of it is at risk. That’s because bankruptcy law allows you to protect certain property with available exemptions. Depending on where you live and your state’s law, you may be entitled to state or federal bankruptcy exemptions. It’s important to claim your exemptions to protect your assets. If you don’t, the bankruptcy trustee is entitled to sell the property and disburse any left-over money to secured and unsecured creditors. 

How non-exempt assets are handled works differently in a Chapter 7 bankruptcy than in a Chapter 13 bankruptcy proceeding. In a Chapter 7 case, property of the estate is sold by the trustee for the benefit of the filer’s unsecured creditors. In a Chapter 13 bankruptcy, non-exempt assets can be kept if the filer can afford to pay back the value of that asset through their repayment plan. A Chapter 13 bankruptcy, also known as a reorganization of debt, is a payment plan approved by the bankruptcy court that lasts between 36 to 60 months. The amount of the payment plan depends on the value of non-exempt assets and disposable monthly income. In essence, the filer pays for the ability to keep their non-exempt property as part of their Chapter 13 payment plan. The money paid into the monthly plan is then distributed by the bankruptcy trustee to their creditors, in order of priority pursuant to the Bankruptcy Code. Also, because the payment plan is based on the filer’s current income, post-petition, meaning after the bankruptcy filing, monthly payments may increase or decrease, depending on any changes in income.

Regardless of the bankruptcy exemptions, all assets have to be listed in a bankruptcy petition. For example, benefits under the Employee Retirement Income Security Act (ERISA), retirement accounts such as 401K’s, and education savings accounts are listed in the bankruptcy petition but protected as a bankruptcy exemption. 

Other assets that are part of the bankruptcy estate and are sometimes confused as exempt assets are tax refunds. Depending on the amount of the tax refund and when you file for bankruptcy, it may or may not be exempt. For example, you’re filing your Chapter 7 bankruptcy in February and you received your tax refund a few weeks earlier. As a pre-petition asset, meaning before you filed your bankruptcy, unless you can claim a bankruptcy exemption that protects your tax refund, your refund will become part of the bankruptcy estate and the bankruptcy trustee will be entitled to your refund. The same could happen post-petition, meaning after you filed your bankruptcy petition. For example, you filed for bankruptcy today and a few weeks later you receive your tax refund. That’s why it’s important to know when to file for bankruptcy. 

If the tax refund is over the exemption limit, the bankruptcy trustee can keep the portion above that limit. If you are considering filing your bankruptcy case near tax season, you should consult with a bankruptcy attorney to find out how you can best protect your tax refund. Remember, a consultation with a bankruptcy attorney is confidential because of the attorney-client relationship. This means your bankruptcy lawyer can’t discuss your conversations with the Bankruptcy Court or the bankruptcy trustee. 

If a life insurance policy is part of the bankruptcy estate depends on how it is categorized. For example, there are two types of life insurance policies: term life and whole life insurance. A term life insurance policy has no value until the time of death of the policyholder. Therefore, it’s not part of the bankruptcy estate. However, a whole life insurance policy has a “cash surrender value,” meaning it’s an asset that you can borrow against, therefore, it’s part of the bankruptcy estate. Depending on the bankruptcy exemptions, a whole life insurance policy may not be protected. Also, it’s a common belief that cemetery lots and timeshares aren’t part of the bankruptcy estate, but both are an ownership interest in an asset and therefore must be listed in the bankruptcy forms. Whether a timeshare or cemetery lot is protected by a  bankruptcy exemption depends on the equity. Equity is the value of the asset minus what you owe on it. 

Common law versus community property states

How assets are listed in a bankruptcy filing is different for individual debtors and married couples, and whether they live in a common law or community property state.   Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin, and Alaska, are community property states. Note that Alaska is a combination of both common law and community property. 

In community property states, a married couple each has a 50 percent interest in property when it’s obtained during the marriage minus certain exceptions. In a common law state, a spouse may own less than half of a property bought during the marriage and may even be entitled to a percentage of property that was bought before the marriage. Because common law states also have exceptions, always consult with a family law attorney first to determine what rights if any you may have to property.

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Conclusion

When it comes to filing for bankruptcy, it’s important to be informed. That’s why it’s important to know the value of your bankruptcy estate and to what extent your assets are protected by bankruptcy exemptions. At Upsolve, we’re here to help you with your bankruptcy case free of charge. Search through hundreds of informative articles on bankruptcy, how to reduce and eliminate credit card debt, and other debt-relief options available to you in our Learning Center. If you don’t qualify for our free service or still want to talk with a bankruptcy attorney, we can provide you with a referral so that you make the right decision regarding your financial future.

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