When you file either a Chapter 7 or Chapter 13 bankruptcy case, a “bankruptcy estate” is automatically created. The Bankruptcy Code defines the bankruptcy estate very broadly, and includes all of your legal or equitable interests in property. Your bankruptcy estate is the first step in determining what (if any) assets are available to pay creditors, and the administration of the bankruptcy estate is supervised by the bankruptcy trustee.
Some property is not included in the bankruptcy estate. For example:
The debtor’s rights in spendthrift trusts, ERISA qualified retirement plans, and 401K plans are excluded by law from the bankruptcy estate;
Property that is not owned by the debtor, and which the debtor has no right to possess or control, is not part of the bankruptcy estate; and
A Chapter 7 debtor’s wages are not part of the debtor’s bankruptcy estate.
Property that is not part of a bankruptcy estate is, by definition, beyond the reach of creditors and the trustee.
Property included in the bankruptcy estate is under the supervision and legal control of the bankruptcy court and trustee. While actual possession of the property does not change hands, and you will not see any change in the day-to-day status of your ownership interest, it is important to understand that you are no longer in full control over your property. Selling or transferring property of the bankruptcy estate is prohibited without the court’s permission. A tax refund that you are entitled to receive is also part of the bankruptcy estate, so speak to your attorney prior to spending any tax refund money you receive after your bankruptcy case is filed.
Property of the estate is generally protected through state or federal legal exemptions. While exempt property is still technically part of the bankruptcy estate, the legal exemption prevents creditors from collecting from exempt property. In order for a legal exemption to be effective, the property must be sufficiently identified and the appropriate legal exemption applied. Bankruptcy case law is full of examples of lazy debtors who fail to list property (including houses and cars!), and inept attorneys who fail to apply the correct exemption law. Often the bankruptcy courts have little sympathy for such carelessness and will deny the exemption, often costing the debtor thousands of dollars! The moral of the story is: fully disclose all property in your bankruptcy schedules.
In most cases the formation of a bankruptcy estate is simply a formality; the debtor generally is not aware of any change to the status of property rights. However, understanding the creation of the bankruptcy estate can prevent unnecessary complications in your bankruptcy case. The best and safest advice is to consult with your attorney before selling or transferring your property after filing bankruptcy.