When you file for bankruptcy, most of your property becomes property of the bankruptcy estate. Read on to learn more about the bankruptcy estate and what property it includes if you file for Chapter 7 or Chapter 13 bankruptcy.
If an asset is part of your bankruptcy estate, the court has the power to administer it in your bankruptcy case. This means that if you can’t exempt the asset, the bankruptcy trustee can sell it and pay your creditors with the proceeds in a Chapter 7. In a Chapter 13 bankruptcy, you keep all of your assets. However, you must obtain permission from the court prior to disposing of any property of the bankruptcy estate.
What is considered property of your bankruptcy estate depends on whether you are filing a Chapter 7 or Chapter 13 bankruptcy. Below, we discuss what the bankruptcy estate includes in a Chapter 7 and Chapter 13 case.
The following property is considered property of the bankruptcy estate if you file for Chapter 7 bankruptcy.
The bankruptcy estate in a Chapter 7 includes almost all property you own when the case is filed. The property does not have to be in your possession as long as it is legally yours. For example, a security deposit you gave your landlord is still part of your bankruptcy estate.
Property acquired after the bankruptcy is filed is not part of the bankruptcy estate. However, there are certain exceptions to this rule (discussed below). Also, certain types of property such as Social Security payments and some retirement plans are not considered property of the bankruptcy estate either.
(To learn about retirement funds not in the bankruptcy estate, see Can You Keep Your Retirement Accounts in Bankruptcy?)
The bankruptcy estate also includes any property you are entitled to but have not yet received. This includes assets such as tax refunds, accounts receivable, or insurance proceeds from an accident that occurred prior to the bankruptcy.
Certain types of property you acquire or become entitled to within 180 days after filing for bankruptcy become part of your bankruptcy estate as well. These include inheritances, life insurance or death benefit plan proceeds, and property from a marital settlement or divorce decree.
(To learn about inheritances in bankruptcy, see If You Receive an Inheritance During Your Bankruptcy Case.)
If any property included in your bankruptcy estate generates income or profit, it will also be part of the bankruptcy estate. For example, rents received from an investment property that was part of the bankruptcy estate are considered property of the estate as well.
If you gifted or transferred any property out of your name for less than fair market value before filing for bankruptcy, the trustee may claim the transfer was fraudulent and bring the property back into the bankruptcy estate.
Also, you can’t prefer one creditor over another in bankruptcy. As a result, paying a creditor more than what it would have received through bankruptcy may be considered a preferential payment. This is usually the case if the payment was over $600 in aggregate and made within 90 days (or one year if payment was made to an insider) before the case was filed. If so, the bankruptcy trustee may sue the creditor to get the payment back and administer it as property of the estate.
(To learn more see, The Clawback Provision and Preferential Transfers.)
The bankruptcy estate in a Chapter 13 includes all property of the estate discussed above under Chapter 7 bankruptcy. But in addition, it includes property acquired and income earned during the bankruptcy until the case is completed, dismissed, or converted. The Chapter 13 bankruptcy estate is broader because it is funded by your earnings and takes three to five years to complete. However, unlike a Chapter 7, you get to keep all of your property even if you can’t exempt it all.
Whether you live in a common law or community property state also affects what is considered property of the bankruptcy estate. In a common law state, if you are married and filing a joint bankruptcy all property you own between you and your spouse is part of the bankruptcy estate. If you are married but filing alone, only your separate property and your half of any jointly owned assets are property of your bankruptcy estate.
If you are filing a joint bankruptcy in a community property state, all property owned by you and your spouse is property of the estate just like in a common law state. However, if you are married and filing alone, your separate property and all community property (not just your half) are considered part of your bankruptcy estate.