Chapter 7 Bankruptcy Estate

A Chapter 7 bankruptcy is a liquidation. Most of the debtor's assets which have a significant market value and are not covered by exemptions are sold by the trustee to pay off creditors. Hence, 2 forms of a Chapter 7 bankruptcy petition are Schedule A – Real Property and Schedule B – Personal Property, in which the debtor must list all of his property, the location of the property, and its fair market value. This property constitutes the bankruptcy estate, out of which the trustee may select assets to sell to pay unsecured creditors. Property received after the bankruptcy filing is generally not part of the bankruptcy estate unless the debtor was entitled to receive it at the time of the filing. The rest of this article deals with personal property; real property is covered in a later article.

Personal property items that are included in the bankruptcy estate:

1. Cash on hand.
2. Checking, savings, or other financial accounts.
3. Security deposits with public utilities, telephone companies, landlords, or others.
4. Household goods and furnishings, including audio, video, and computer equipment.
5. Books, pictures, art, antiques, stamp or coin collections, record, tape, compact disc, or other collections or collectibles.
6. Clothing.
7. Furs and jewelry.
8. Firearms, sports, photographic, and other equipment.
9. Interests in insurance policies.
10. Annuities.
11. Interests in an education IRA.
12. Interests in IRA, ERISA, Keogh, or other pension or profit sharing plans.
13. Stock and interests in businesses.
14. Interests in partnerships or joint ventures.
15. Financial instruments, such as government and corporate bonds.
16. Accounts receivable.
17. Alimony, maintenance, support, and property settlements to which the debtor is or may be entitled to.
18. Liquidated debts owed to debtor, including tax refunds.
19. Equitable or future interests, life estates, and rights or powers exercisable for the benefit of the debtor.
20. Contingent and noncontingent interests in the estate of a decedent, death benefit plan, life insurance policy, or trust.
21. Other contingent and unliquidated claims of every nature, including tax refunds, counterclaims of the debtor, and rights to setoff claims.
22. Patents, copyrights, and other intellectual property.
23. Licenses, franchises, and other intangibles.
24. Customer lists or other compilations containing personally identifiable information provided to the debtor by individuals to obtain a product or service from the debtor primarily for personal, family, or household purposes.
25. Automobiles trucks, trailers, and other vehicles and accessories.
26. Boats, motors, and accessories.
27. Aircraft and accessories.
28. Office equipment, furnishings, and supplies.
29. Machinery, fixtures, equipment, and supplies used in business.
30. Inventory.
31. Animals.
32. Crops - growing or harvested.
33. Farming equipment and implements.
34. Farm supplies, chemicals, and feed.
35. Other personal property of any kind not already listed.

Note that the list is of everything that you own; it doesn't matter whether you possess it or not. So if you lent your friend your iPod, then that must be listed. Some property that might not be so obvious is your security deposit to rent an apartment, for instance.

The bankruptcy estate may also include property that was transferred to another party in the period, usually 1 or 2 years, previous to the date of the filing. Often, the debtor who has spent time thinking about a Chapter 7 bankruptcy will try to protect some property by transferring the title to a relative or friend, or sell it for less than what it is worth, or do other things to protect assets before filing for bankruptcy. However, the debtor must list significant financial transactions or asset transfers that have occurred in the time period, usually 1 or 2 years, before the filing in the bankruptcy form Statement of Financial Affairs, along with the name and address of the transferee, a description and value of the property, and the relationship of the transferee to the debtor. If the transferred item has significant value or was sold for less than fair market value, the trustee may get it back to sell for unsecured creditors. Although some might consider not listing such transactions as a way to protect assets, this would be considered perjury, and would be prosecuted as such by the trustee, resulting in a dismissal of the case.

The bankruptcy estate may also include payments made to creditors in the 90 days previous to the filing or within the previous year to insiders, who are relatives, friends, business partners, or a corporation of the debtor. Some debtors borrowed money from relatives or friends, or a relative or friend co-signed a loan. The debtor may also want to keep some credit cards by paying off 1 or more so that they don't have to be listed as a debt or may pay more on secured loans. In such cases, the debtor is highly motivated to pay off or reduce such loans before filing by making what are called preference payments. The trustee will retrieve these excess payments and distribute the money equally to the unsecured creditors.

The bankruptcy estate also includes any money that the debtor is legally entitled to receive at the time of the filing, but has not yet received it. For example, inherited property, income from a trust, insurance proceeds, or potential claims from a lawsuit, accounts receivable for goods or services provided before the filing, and money earned from property that is part of the bankruptcy estate, such as rent from real property, or from contracts that were in force at the time of the filing, such as royalties from a performance or a book. Some of this property or income is received because certain events happened, such as the death where the debtor is named the beneficiary or an accident where the debtor may have a claim. Only such events that occurred before the filing are considered part of the estate.

180-Day Rule

Although most property acquired after filing for bankruptcy is not included in the bankruptcy estate, there are important exceptions. If, within 180 days of the bankruptcy filing, the debtor becomes entitled to an inheritance, life insurance proceeds, or some other death benefit, or becomes entitled to property because of a divorce proceeding, then the debtor must report this to the trustee on a supplemental form, even if the entitlement occurs after the bankruptcy discharge. ^{11 U.S.C. §541(a)(5)}

Marital Property

What marital property—property owned by both spouses—is included in the bankruptcy estate depends on whether the bankruptcy filing is a joint or single filing, and on state laws. Generally, all marital property is included in the bankruptcy estate if it is a joint filing. However, when only 1 spouse is filing, then what marital property becomes part of the bankruptcy estate is determined by the state laws that govern how marital property is owned.

In community property states—Alaska, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin—all property acquired during the marriage is owned jointly by both spouses. It does not include property acquired before the marriage, property received by 1 spouse as a gift or inheritance, or property acquired after a legal separation. Since marital property is jointly owned, it becomes a part of the bankruptcy estate even if only 1 spouse files.

In tenancy by the entirety states—Delaware, District of Columbia, Florida, Hawaii, Illinois, Indiana, Maryland, Massachusetts, Michigan, Missouri, North Carolina, Ohio, Pennsylvania, Rhode Island, Tennessee, Vermont, Virginia, and Wyoming—marital property is owned by the marriage itself as a legal entity. Neither spouse has the right to alienate or encumber the property without the consent of the other. Hence, properties owned by tenancy by the entirety are excluded from the bankruptcy estate.

The remainder of the states not mentioned above are common law property states in which either of the spouses own property separately or jointly. However, joint ownership is not determined by when the property was acquired as in community property states, but by whether there is evidence of joint ownership, such as having the names of both spouses on the title certificate or if the property was acquired for both spouses.

In common law states, all property of the spouse filing for bankruptcy and half of the jointly owned property is part of the bankruptcy estate.

On both Schedule A - Real Property and Schedule B - Personal Property bankruptcy forms, ownership is indicated by labeling each property with an H, W, J, or C, for Husband, Wife, Joint, or Community.

Property Excluded from the Bankruptcy Estate

Some property is not included in the bankruptcy estate, so the trustee cannot use it to pay creditors. This includes property not subject to the 180-day rule that is acquired after the filing, property held as collateral by a licensed lender, such as a pawn broker (so you can't give property to your friends and claim that it is collateral for a loan), and other people's property that are in your possession.

Also excluded are all forms of retirement accounts that are exempt regardless of whether you use state or federal exemptions. Although most retirement accounts are exempt without limit, traditional and Roth IRA's have a million dollar limit that is increased every 3 years for inflation. So any amount over the limit in a traditional or Roth IRA becomes part of the bankruptcy estate.