When thinking about bankruptcy it is useful to understand the concept of the “bankruptcy estate.” The bankruptcy estate is a fictional estate that is created upon the filing of a petition in bankruptcy court. It is essentially a basket of assets into which the debtor’s assets are placed for administration during the bankruptcy case.
People considering bankruptcy often ask, “What property do I have to include in my bankruptcy?” Generally speaking the debtor must disclose all assets and debts in her bankruptcy petition. However, the real question is what assets go into the bankruptcy estate basket? Section 541 of the Bankruptcy Code defines “property of the estate” and sets forth the basis for determining which interests qualify for inclusion in the bankruptcy estate in Chapter 7, 11 and 13 bankruptcy cases.
Firstly, it is important to remember that bankruptcy law is federal law. However, bankruptcy law in many instances is informed by and reflects state law and, thus, varies from state to state. State law determines whether a particular right, power or interest is “property” in the first place, and the nature and extent of the debtor’s interest in the property. Accordingly, property rights of the debtor in bankruptcy estate assets generally are determined under state law.
On the other hand, the question of whether a particular property interest is included in the bankruptcy estate is determined under federal bankruptcy law. So, state law governs a person’s property rights, and federal law governs whether or not such right in property is included in the bankruptcy estate. Once a bankruptcy petition is filed, all of the debtor’s property and interests in property as defined under state law becomes property of the bankruptcy estate.
The bankruptcy estate is broadly defined – all of the debtor’s legal and equitable interests in property at commencement of the bankruptcy case are automatically included in the bankruptcy estate. Even property that is omitted in the petition is included in the bankruptcy estate. Of course, property in which the debtor has no legal or equitable interest when the bankruptcy petition is filed is not included in the bankruptcy estate.
Regardless of the location of the property all estate property in a Chapter 7 case must be turned over to the bankruptcy trustee. While the property is not always physically transferred to the bankruptcy trustee, the debtor relinquishes her rights and interests in estate property upon commencement of a Chapter 7 case, including title and the right to sell or transfer the property while the case is pending.
However, just because property is included in the bankruptcy estate and is under the control of the chapter 7 trustee does not mean the property will be sold. Whether property will be liquidated to pay creditors in chapter 7 depends on whether or not the property is exempt under state law. If exempt, the property will not be sold and will ultimately be abandoned by the bankruptcy trustee and revert back to the debtor. Non-exempt property, however, may be sold by the trustee and the proceeds used to pay creditors. Most people who file chapter 7 bankruptcy do not have any non-exempt assets and keep all of their personal property.
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