What is a Bankruptcy Estate?
When a bankruptcy case is filed with a court, a bankruptcy estate, which includes all of a debtor’s legal and equitable interests, is formed. Typically, the estate is subject to the bankruptcy court’s jurisdiction, and it is reviewed by a court-appointed bankruptcy trustee. The trustee generally represents the creditors’ interests in the suit. During the bankruptcy proceedings, the estate becomes the legal owner of the debtor’s tangible and intangible assets. Assets held in a bankruptcy estate are frequently sold by the trustee in order to pay off the debtor’s outstanding obligations.
Under bankruptcy estate law in many jurisdictions, a bankruptcy estate includes not only the debtor’s interests but also any community property belonging to the debtor and his or her spouse. The estate typically contains all of the debtor’s tangible assets. For example, the estate may include a piece of land owned by the debtor, a car, or a collection of artwork. Usually, a debtor cannot sell or transfer property that is part of the bankruptcy estate without the court's permission.
As a general rule, bankruptcy estates can also include intangible rights. For instance, the estate may contain stock options, intellectual property, business goodwill, or the right to file a lawsuit. An estate can also incorporate the debtor’s right to receive inheritances once the bankruptcy suit has been filed. Certain tax rights may also become part of the estate. For example, an estate may include tax attributes or tax refunds for pre-petition years.
Usually, when starting a bankruptcy case, a debtor must disclose all of the estate’s assets in a bankruptcy schedule. Any assets that are not exempt are usually sold by the bankruptcy trustee. The proceeds are used to pay administrative fees relating to the bankruptcy proceeding as well as to pay off creditors.
Some assets may be exempt or removed from the bankruptcy estate. For instance, in some jurisdictions, a debtor can exclude rights in spendthrift trusts, 401(k) plans, and certain qualified retirement plans from the estate. Generally, bankruptcy statutes dictate what type of assets may be excluded from the estate. Statutory exclusions can vary from jurisdiction to jurisdiction.
Typically, a debtor is not required to list exempt assets as part of the bankruptcy estate. Essentially, this means that exempted assets cannot be reached by creditors or by the bankruptcy trustee. The debtor may retain exempted property and use it to start over after the bankruptcy proceedings are finalized.
@David09 - If you want to hear a real sad story, I worked for a telecommunications company that filed for bankruptcy twice, within a two year period.
It was chapter 11 bankruptcy, and I think like chapter 13, this was meant to restructure debt. Still, filing bankruptcy twice is never good. We eventually got bought out, which I think was the better way to go.
@SkyWhisperer - My belief is that bankruptcy is never a good idea. It stays on your credit record for a long time, making it difficult for you to borrow again in the near future. Before filing you should consult with personal financial advisors to see if there are alternatives.
However, on balance, I think if you have to file for bankruptcy, a chapter 13 bankruptcy is better than chapter 7. Chapter 7 wipes everything out so you don’t have to repay anyone; with chapter 13, you do need to repay some or all of your bankruptcy debt, just as your uncle did with the computer vendor.
The law, as I understand it, gives you five years to repay the debts.
I say it’s better because, although it doesn’t get you off the hook financially, it helps to improve your credit and at least keep you in some good standing with your creditors.
@MrMoody - My uncle, unfortunately, ended up filing bankruptcy on his small computer training business. He bankrolled the whole operation with credit cards, and eventually maxed them out. Unfortunately, credit card bankruptcy is quite common as these cards offer easy money at high interest rates.
He couldn’t get loans from the banks, because he had poor credit, so starting the computer training business was risky indeed. It was a chapter 7 bankruptcy so most debts were wiped out, but not without a lawsuit.
The lawsuit was filed by the company that sold him the computers for his training class, thousands of dollars of equipment. In the end he avoided the lawsuit by creating a repayment schedule to pay off that debt, which he did by selling his house.
That’s how bankruptcy works. It’s not a pretty picture nor is it an easy way out, by any stretch of the imagination.
If you are an independent proprietor or a small business of any kind, my advice to you is to set yourself up as a limited liability corporation, an LLC.
The reason is that if you’re ever filing bankruptcy, or get sued in any way, your business assets could be taken away but you won’t lose your shirt, and you’ll still have a place to live.
At least that’s the way I’ve understood it. Without this, someone could sue you for literally everything including your home, and as litigious as our society has become, that’s a very real possibility.
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