The term “Bankruptcy Estate” is crucial to understanding Chapter 7 or Chapter 13 bankruptcy.
What is the Bankruptcy Estate? Do you have one? Will you get one if you file for bankruptcy?
This Article will explain the concept of the so-called Bankruptcy Estate. Most importantly, it will explain what this Bankruptcy Estate to do with you and your bankruptcy case.
The Bankruptcy Estate Defined
You make think of an “estate” as something on which a member of the British Royal family resides. This may be true in that context. However, in the legal context, an “estate” refers to something much more difficult to locate on a map.
The bankruptcy estate is a “legal” estate. Have you heard of a Michigan probate estate? This is a similar concept.
A probate estate is created when a Michigan citizen passes away without leaving a will. The probate estate is created so that a court can determine which beneficiary or creditor gets what.
The Bankruptcy Estate comes into being not when you die but when you file for bankruptcy. It is the extended jurisdiction of the US Bankruptcy Court over all of your property, debt, and income.
You create it upon the filing of a bankruptcy case by automatic function of Federal law.
What Is the Purpose of the Bankruptcy Estate?
Why is this necessary?
This is necessary because the value of your assets plays an enormous role in the bankruptcy process. Contrary to popular belief, rich people with mansions and super-cars do not skate through bankruptcy, cost-free. The Court pays your creditors some of what they are owed (or not) depending on this value.
You must disclose your assets to prove you are a “good faith debtor” to receive a discharge.
The Bankruptcy Estate & the Good Faith Debtor
Keep in mind, first, that bankruptcy is a Federal legal process. It exists because the US Constitution (very vaguely) provides for its existence. The US Congress has drafted a number of Federal statutes over the past 200 years to formulate the bankruptcy process.
The current such statute—the US Bankruptcy Code—was enacted in 1978. Congress has revised this law multiple times.
The Bankruptcy Estate, however, has been a vital component of the Code since its original enactment in 1978.
The Bankruptcy Code and the Congressional Record of its enactment requires that the debt discharge available through bankruptcy is available only to “good faith debtors.”
In particular, the Chapter 7 “complete discharge” that requires no repayment of any debt through the bankruptcy process is available only to those debtors whose income is low enough to pass them through the Means Test eligibility formula.
Likewise, the value of your assets will greatly affect the cost of your Chapter 7 or Chapter 13 process, albeit differently in each case.
If you own too much valuable stuff, you will not slide through the US bankruptcy process free of cost, one way or another.
The Bankruptcy Estate in Michigan Chapter 7 Bankruptcies
Chapter 7 bankruptcy is a “liquidation” bankruptcy.
This term refers to the fact that, with exceptions, you need not repay your debts in a Chapter 7. However, Chapter 7 is also a “liquidation” proceeding in that your assets are potentially subject to seizure and liquidation.
Don’t panic! Most people who file Chapter 7 bankruptcy in Michigan do not lose any property. Nevertheless, you should take this seriously.
When you file a Chapter 7 bankruptcy in Metro Detroit or elsewhere, you, as noted, automatically create a Chapter 7 Bankruptcy Estate.
The Bankruptcy Estate, as you’ve now guessed, contains everything you own and all claims you have to property or money. You cannot exclude any property regardless of value or lack thereof from disclosure. Even the clothes on your back become assets of your Bankruptcy Estate when you file Chapter 7 bankruptcy.
After filing, the Court assigns a Chapter 7 Trustee to your bankruptcy case. The Chapter 7 Trustee is the Trustee of your Bankruptcy Estate.
The Trustee will seize any “non-exempt” assets of your Bankruptcy Estate to sell off (liquidate) for the benefit of your creditors.
You can read more about the Chapter 7 Trustee here.
What does “non-exempt” mean, however?
Exempting Assets from the Bankruptcy Estate
Most people don’t lose any property when they file Chapter 7 because the US Bankruptcy Code does allow you to remove, or exempt, certain types of property from your Bankruptcy Estate.
These statutory “exemption” provisions were designed by Congress to allow normal households to retain the property necessary to obtain the “fresh start” promised by the Bankruptcy Code.
There are different exemptions for different types of property. Depending on the type of property involved, the exemptions have different dollar-value caps. Some types of property have no exemption protecting them at all.
For example, a tax-qualified retirement account such as a 401(k) or 403(b) account has a limitless exemption available. You can, in a Chapter 7 bankruptcy, protect 100% of your 401(k), even if it has hundreds of thousands of dollars of value. (Note that this is not legal advice: a high-value 401(k) may not be seized in a Chapter 7, but it’s presence could raise other “good faith” questions.)
Alternatively, a vacation property in the Bahamas has no exemption to protect it whatsoever.
If you (on paper, in your bankruptcy petition schedules) assign an exemption to an item of property and the value of the exemption exceeds the fair market (“garage sale”) value of the property—it is fully exempted.
That is, it has been removed from the Bankruptcy Estate.
The Chapter 7 Trustee has no authority to seize it as it has been removed from the jurisdiction of the US Bankruptcy Court.
The Bankruptcy Estate and Exemptions in Chapter 13 Bankruptcies
Assets are not liquidated in Michigan Chapter 13 bankruptcy cases. However, the Bankruptcy Estate remains in full force through that process.
A Chapter 13 bankruptcy is a reorganization bankruptcy. It is not a liquidation bankruptcy.
We will not discuss the Chapter 13 process in detail in this Article. (Read more about how Chapter 13 works here and the Chapter 13 Payment Plan here.)
What is important to note is that the Bankruptcy Estate serves a slightly different purpose in Chapter 13, as does the process of exempting assets.
While you are in Chapter 13 bankruptcy, which is potentially a 5-year-long process, you do not have the authority to liquidate the assets of the Bankruptcy Estate without court approval. The Chapter 13 Trustee retains authority over the assets of the Bankruptcy Estate through the full Chapter 13 process.
This includes “exempt” assets. Particularly real estate, which cannot be sold without court approval.
In Chapter 13, your assets are not subject to liquidation. However, unsecured creditors, who are paid last in priority in your Chapter 13 Payment Plan, must receive the value of any non-exempt assets.
If you have fully exempted all of the assets of your Bankruptcy Estate, there will be no minimum amount of money required to be paid to your unsecured creditors. (Exception: the Means Test sometimes requires such a minimum distribution for totally unrelated reasons.)
Your unsecured creditors may receive $0.01 to split amongst themselves. Bully for them.
However, if you have $10,000 in non-exempt assets, your monthly Chapter 13 Plan Payment must be large enough to pay your bankruptcy attorney’s fees, your Chapter 13 Trustee’s fees, your priority unsecured creditors—and still leave $10,000 for distribution to your unsecured creditors.
Non-exempt assets of your Bankruptcy Estate will make your Chapter 13 more expensive.
Consult an Experienced Detroit, Michigan Bankruptcy Attorney
If you are considering filing for bankruptcy in Livonia and elsewhere in southeast Michigan, it is essential that consult an experienced attorney if you are concerned about your assets.
A bankruptcy lawyer will be able to tell you at your initial consultation, in most cases, whether a specific lawsuit judgment vexing you will be dischargeable in bankruptcy or not.
Attorney John Hilla has successfully represented hundreds of clients through Chapter 7 and Chapter 13 bankruptcy processes in Michigan.
Offering free, virtual consultations and friendly, one-on-one service from Livonia bankruptcy attorney John Hilla, we will ensure that your matter is handled properly, competently—and with kindness.