Questions often arise on bankruptcy forum websites about the bankruptcy estate. What exactly is the bankruptcy estate?
Bankruptcy Estate is a Legal Term
According to the U.S. Courts bankruptcy website, the bankruptcy estate is “all legal or equitable interests of the debtor in property at the time of the bankruptcy filing. The estate includes all property in which the debtor has an interest, even if it is owned or held by another person.”
For laymen like myself, I go a little further in defining the bankruptcy estate. The bankruptcy estate includes all assets and property the debtor has an interest in when they first file, but in a chapter 7 bankruptcy, after a debtor has filed the petition, the bankruptcy court representative will review the asset list to determine which assets of the estate are exempt from the liquidation process.
Any exempt assets will then be determined as property of the debtor. Certain assets in a liquidation bankruptcy estate can be bought back by the filing debtor if the debtor has the ability to do so. In reorganization bankruptcies, qualifying assets remain as part of the bankruptcy estate while the debtor makes a predetermined plan payment toward secured and unsecured debts over a certain period of time.
When the Bankruptcy Estate Changes
Sometimes during the bankruptcy process, assets or interest in property can change for a debtor. For instance, a debtor could win the lottery, and the cash from the lottery would be considered a new asset for the bankruptcy estate. On the other hand, vandals could destroy an uninsured asset of the bankruptcy estate before it was ever liquidated, and the bankruptcy estate would lose the value of the property for the estate. Things happen and things can change.
Bankruptcy laws dictate that any additional asset, like a windfall, must be reported to the bankruptcy court. The bankruptcy trustee will determine whether or not the asset is worth liquidating and whether or not an exemption might apply if claimed by the debtor. Likewise, bankruptcy law dictates a debtor’s responsibility to inform the court when an asset is lost to the bankruptcy estate.
In most instances, a filing chapter 7 bankruptcy debtor will have the opportunity to buy back any asset not exempt and belonging to the bankruptcy estate. When assets of the bankruptcy estate are liquidated in a chapter 7, the proceeds are used to pay off unsecured debt in a prioritized list until all the money from the proceeds are gone. If there is more monetary proceeds from the liquidation sales, the proceeds will be returned to the filing debtor, less any court fees such as the salary of the bankruptcy trustee.
When Does the Bankruptcy Estate End?
The bankruptcy estate ends when the creditors of unsecured debts have been paid their portion during the bankruptcy process, when what proceeds from the sell of assets left over are returned to the filing debtor, and the bankruptcy trustee closes the case.
Although it is rare, if a bankruptcy court finds out that the debtor has committed fraud in their bankruptcy dealings, the bankruptcy judge can reopen a case and declare any hidden assets as part of the bankruptcy estate.
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