The possessions of the bankruptcy petitioner are referred to as the “bankruptcy estate.” The estate is used to satisfy any debts owed to creditors. All of the debtor’s assets are included in the bankruptcy estate once a bankruptcy case is filed.
Through claims of exemption, the debtor is able to take property out of the estate. The vast majority of bankruptcies involve people who have no assets. These are situations where there are either no non-exempt assets at all or when the value of the non-exempt assets is insufficient to justify sale and distribution of things.
The Bankruptcy Code defines “property” quite broadly to include all of the bankrupt’s legal and equitable rights as well as everything that the debtor and his spouse jointly own. Before the exemption claims are settled, even the assets the debtor designates as exempt property are considered “property of the estate” (generally 30 days after the 341 meeting).
What is contained
In addition to the debtor’s evident and physical assets, the estate also consists of items such as the right to stock options, the right to inheritances acquired within six months of the bankruptcy filing, the right to tax refunds for prior tax years, the right to intellectual property, and even the right to tax benefits like loss, etc. The Bankruptcy Code grants the trustee the authority to reclaim property that the debtor had wrongfully transferred away or that creditors had taken just before the case was filed.
What is omitted
The debtor’s rights in spendthrift trusts, ERISA qualified retirement plans, and 401K plans are the most significant exclusions from the expansive definition of “property of the estate”; these are not considered to be “property of the estate.”
Most courts hold that Social Security is not also part of the estate. A debtor does not need to declare an asset exempt in order to shield it from creditor claims if it is not included in the estate since it is automatically out of the trustee’s and creditors’ grasp.
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As soon as it departs the estate
Property no longer qualifies as estate property once an exemption has become final or when it is given up by the trustee. Why do trustees let assets lapse? A piece of property is abandoned if its net worth to the estate is zero or less than the costs of selling it, or if selling it would result in a tax burden that would be more than the revenues of the sale.
Abandonment happens either on motion during the course of the lawsuit or by operation of law when the case is over. Upon the conclusion of the case, the trustee is presumed to have abandoned any property specified in the schedules that he does not manage (sell).