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Property of the Estate in Bankruptcy: Difference between Chapter 7 and Chapter 13
Bankruptcy Code has Broad Definition of Property
(7) Any interest in property that the estate acquires after the commencement of the case.
Basically, once you have file for bankruptcy, you don’t own anything; it all becomes property of the estate. The court, after looking at what you can keep, abandons certain property back to the debtor, and keeps the rest and sells it.
In a Chapter 7 bankruptcy, possessions are defined as property owned on the date the case is filed.
In a Chapter 13 case, the law states, “Not only does it include 541 properties, it also includes all property the debtor acquires after the case is filed, but before the case is closed, dismissed, or converted to another section.”
Property Includes All of Debtor’s Legal and Equitable Interests
The Seventh Circuit has defined the scope of Section 541 broadly stating, “When a bankruptcy petition is filed, virtually all property of the debtor at that time becomes property of the bankruptcy estate. Section 541 of the Bankruptcy Code defines ‘property of the estate’ broadly to include all of the debtor’s interests, legal and equitable. United States v. Whiting Pools, Inc., 462 U.S. 198**, 204-05 and nn. 8, 9, 103 S.Ct. 2309, 2313 and nn. 8, 9, 76 L.Ed.2d 515 (1983). ‘[T]he term `property’ has been construed most generously and an interest is not outside its reach because it is novel or contingent or because enjoyment must be postponed.’ Segal v. Rochelle,382 U.S. 375**, 379, 86 S.Ct. 511, 515, 15 L.Ed.2d 428 (1966) (bankruptcy estate includes right to refund). A debtor’s contingent interest in future income has consistently been found to be property of the bankruptcy estate. See In re Neuton, 922 F.2d 1379**, 1382-83 (9th Cir. 1990) (collecting cases). In fact, every conceivable interest of the debtor, future, nonpossessory, contingent, speculative, and derivative, is within the reach of § 541 (emphasis added).” In the Matter of Yonikus, 974 F.2d 901** (7th Cir.1992).
Everything you own or are entitled to receive is property of the estate.
However, the bankruptcy code does allow you to get some of that property back, they can’t liquidate everything. Property of the bankruptcy estate is what the court is generally going to keep to pay money back to creditors, what they are going to try and sell.
Here’s how to look at it: If the court was going to sell everything, your clothes, your bed, your pots and pans, etc., and leave you with nothing, you’d have to buy some things to replace that property, it would be on credit, and you’d be right back where you started.
Property Does Not Include Specific Funds and Financial Assets
Note that property of the estate does not include assets that are specifically listed in Sections 541(b)-(c). Among other items, such property does not include funds in an education Individual Retirement Account (IRC §530(b)(1)) if those funds were placed in the account more than a year prior to filing, and subject to certain limitations. 11 U.S.C. §541(b)(5). Such property also does not include funds contributed pursuant to IRC §529(b)(1) for college tuition expenses, again subject to certain limitations. 11 U.S.C. §541(b)(6). The estate also does not include amounts withheld by employers from wages of the debtor, or received by the employer from the debtor as contributions, to ERISA plans under IRC §414(d), deferred compensation plans under IRC §457, or tax-deferred annuities under IRC §403(b). It also does not include amounts contributed by the employee to health insurance plans regulated by state law. 11 U.S.C. §541(b)(7)(B). Spendthrift trusts enforceable under Indiana law would not constitute property of the estate. 11 U.S.C. §541(c)(2).
For your fresh start, the bankruptcy court allows individual consumers to keep certain items, including:
- Any Retirement account (IRA, 401K, PERF)
- Up to $17,600 of equity in your house (as a married couple, that would double to $35,000)
- $9,350 of personal tangible property
- $700 of intangibles ($350/person), which can include:
- stocks and bonds
- lawsuits settlements
- accounts receivable
- anticipated tax refund
- life insurance with a cash surrender value
Next Article in Series: Debtor in Bankruptcy Must Disclose All Assets and Liabilities or Risk Severe Penalties
** Source: Justia
Disclosure required by 11 U.S.C. § 528(a)(3): We, the law office of Tom Scott & Associates, P.C., are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.