The Bankruptcy Estate
One of the most difficult concepts to explain during a short 30-minute consultation with a potential client is the concept of the Bankruptcy “estate.” Sometimes the easiest way to explain it is with analogy to death. When a person dies, their “estate” consists of all assets they held at the time of their death. Similarly, when a person files bankruptcy, their “estate” consists of all interests in property as of the commencement of the case. In a Chapter 7, the estate is fairly fixed and all property acquired after the filing of the case is not part of the estate, but is owned solely by the debtor. In a Chapter 13 the estate is a little broader and encompasses all earnings of the debtor after filing of the case during the course of the Chapter 13 plan.
The concept of “estate” is important because a person filing bankruptcy may lose property they owned prior to the bankruptcy because that property becomes part of the estate. At a conceptual level, this is a very good thing because the Bankruptcy Code limits creditors to claims against the estate. Here is how it works. When a person files bankruptcy everything they own becomes property of the estate (except for exempt property). At the same time, all claims by creditors that once existed against the debtor prior to filing bankruptcy no longer exist against the debtor, but rather, the claims now exist against the estate. In this way, the debtor moves on in time free and clear of all claims. Hence, the debtor emerges free and clear of debt and the creditors will only recover (if at all) against the estate. This is the idea behind the Bankruptcy Code’s fresh start.
Prior to filing any Bankruptcy, it is imperative that a person understand the concept of the Bankruptcy estate and plan accordingly. Often people overlook intangible property interests that are part of the estate. These include all claims the person may have for personal injury against another person or other claims. These “rights to sue” are part of the estate and a Trustee may decide to pursue them on the estate’s behalf, with all proceeds going to the creditors. Inheritance is also part of the estate and includes inheritance received in the six months after a case is filed. Exempt property is not part of the estate but the exemptions must be claimed properly in the schedules.
The Legal Definition of “Estate”
Lawyers may prefer the following definition of “estate.” The Bankruptcy Code provides that the commencement of a voluntary petition under § 301, creates an “estate” comprised of “all legal or equitable interests of the debtor in property as of the commencement of the case.” See 11 U.S.C. § 541(a). The estate does not include “any power that the debtor may exercise solely for the benefit of an entity other than the debtor.” 11 U.S.C. § 541(b)(1). The determination of the extent of a debtor’s interest in property is controlled by state law. See Butner v. United States, 440 U.S. 48, 55, 99 S.Ct. 914, 918, 59 L.Ed.2d 136 (1979).