4.1 Interests in Property

• Library: Bankruptcy Practice in Virginia (Virginia CLE) (2017 Ed.)

4.1 INTERESTS IN PROPERTY

4.101 Concepts

A. Structure of Section 541. Section 541(a) of the Bankruptcy Code is designed to bring into the bankruptcy estate all property interests of the debtor. Section 541 is structured as follows:

Section 541(a) defines what is included as property of the estate.

Section 541(b) defines what is excluded from property of the estate.

Section 541(c)(1) clarifies that property of the estate includes an interest of the debtor even where there are restrictions on transfer of the interest or conditioned on the solvency of the debtor.

Section 541(c)(2) upholds the enforceability of a trust that has a "spendthrift" provision that the debtor could enforce under nonbankruptcy law. This provision is very important to debtors who are beneficiaries of intervivos or testamentary trusts created by someone other than themselves.

Section 541(d) addresses the situation where a debtor holds only bare legal title to property. Only the interest of the debtor becomes property of the estate.

B. Time of Creation. Property in which the debtor has an interest as of the commencement of the bankruptcy case is "property of the estate." The commencement of the case is the date and time stamped by the clerk of court or by CM/ECF, if the petition is filed electronically, on the petition for relief filed by the debtor. This "filing" creates the estate.

There are exceptions. Some property acquired by the debtor after filing will become property of the estate. Examples of this after-acquired property include property the debtor inherits, is awarded in a property settlement or divorce, or receives as a beneficiary of a life insurance policy. ¹

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C. Differences Among Chapters. Section 1306 expands the definition of property of the estate for cases filed under Chapter 13. Specifically, section 1306(a) states that for Chapter 13 cases in addition to the property specified in section 541, property of the estate includes: "all property of the kind specified in [section 541] that the debtor acquires after the commencement of the case but before the case is closed, dismissed, or converted to a case under chapter 7, 11, or 12 of this title, whichever occurs first." ² Section 1306(a)(2) provides that the Chapter 13 bankruptcy estate also includes "earnings from services performed by the debtor after the commencement of the case but before the case is closed, dismissed, or converted to a case under chapter 7, 11, or 12 of this title, whichever occurs first." This Code section expands the scope of property included in the Chapter 13 estate beyond the scope of other chapter proceedings.

Section 1207 of the Bankruptcy Code contains nearly identical language as that contained in section 1306 and likewise expands the property of the Chapter 12 estate to also include property acquired postpetition.

The interplay between sections 1306 (or 1207) and 541 with respect to property acquired postpetition was somewhat unclear until 2013 when, in Carroll v. Logan, ³ the Fourth Circuit found that section 1306 sets forth a straightforward formula for determining property included in the Chapter 13 estate: a Chapter 13 bankruptcy estate is property described in section 541 plus the kind of property described in section 541 and acquired before the Chapter 13 case is closed, dismissed, or converted.

The Fourth Circuit further held that an inheritance received by a Chapter 13 debtor during the pendency of his or her Chapter 13 case, but beyond the 180-day postpetition period referenced in section 541(a)(5), is property of the Chapter 13 estate and must, therefore, be disclosed. ⁴ Additionally, the receipt of an inheritance can be grounds to require modification of a previously confirmed Chapter 13 plan. ⁵ In light of this ruling, it seems clear that the scope of section 1306 is quite broad, and the Chapter 13 estate includes any property interest that the debtor may acquire

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during the life of the Chapter 13 case. ⁶ Therefore, counsel should advise debtor clients of the expanded scope of Chapter 12 and 13 bankruptcy estates and of the obligation to disclose property or rights acquired postpetition. ⁷

D. Exclusion Compared to Exemption.

1. Exemptions. Property of the estate may be exempted and removed from the reach of creditors before, at, and after filing the petition for relief if proper planning and procedure are used. ⁸

2. Exclusions. Certain types of property are excluded from property of the estate by virtue of section 541(b). In some instances, certain types or property or property interests may be both excluded from the estate and exempt under the applicable exemption law. However, property that is excluded from the estate never becomes property of the estate and therefore is not subject to liquidation by a trustee and, furthermore, is not subject to any value limitations that may be contained within exemption statutes. Notable exclusions from the consumer-debtor's standpoint included certain education IRAs ⁹ and college savings plans, commonly referred to as "529 plans" ¹⁰ (although there is a limit on the timeframe for contributions); pension and retirement funds in a retirement plan qualified under the Employee Retirement Income Security Act of 1974 (ERISA); ¹¹ government retirement plans under section 414(d) of the Internal Revenue Code; ¹² deferred compensation plans under section 457 of the Internal Revenue Code; ¹³

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and tax-deferred annuity plans under section 403(b) of the Internal Revenue Code. ¹⁴

Money placed in an ABLE account for the debtor's child, stepchild, grandchild, or stepgrandchild not later than 365 days before the date of filing the petition in bankruptcy is also excluded if the contribution meets certain criteria. ¹⁵ These accounts for persons with disabilities that began before age 26 were established by the Achieving a Better Life Experience Act of 2014. ¹⁶ Virginia was the first state to adopt ABLE Act legislation, currently codified in chapter 7 of title 23.1 of the Virginia Code.

A debtor's interest in property that is subject to valid trust provisions restricting a debtor's ability to transfer his or her interest, commonly referred to as a "spendthrift trust," is also excluded from the bankruptcy estate. This can place significant assets directly benefitting a debtor out of the reach of a bankruptcy trustee. However, state law must be consulted to determine whether the trust provision is valid and enforceable. ¹⁷

Practice Note: When assets are excluded from the estate, it is nevertheless wise to disclose them by including them on the debtor's bankruptcy schedules. The claim of exclusion should be included in the description of the property. The debtor need not claim an exemption in the excluded asset, although there is also no harm in claiming an exemption if the property is the type that is both excluded and exempt and the exemption is not subject to a categorical dollar cap.

4.102 Property Owned with Another.

A. In General. A partial ownership interest is included in property of the estate. A debtor can own real and personal property in various ways, each of which is discussed below and has a particular set of requirements

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and rights. The debtor's particular and specific interest in the property should be disclosed.

B. Tenancies by the Entireties.

1. Characteristics. The essential elements of a tenancy by the entireties are unity of time, unity of title, unity of interest, unity of possession, and unity of marriage. ¹⁸ Virginia law provides that a conveyance to a married couple with the right of survivorship creates a tenancy by the entireties. ¹⁹ The deed must indicate the intention to create a tenancy by the entireties when real property is conveyed; otherwise, a tenancy in common is created. ²⁰ When a married couple holds real estate in a tenancy by the entireties, both spouses own the property, and neither can dispose of any interest in the property without the other's joinder. The proceeds derived from a sale of real estate held as a tenancy by the entireties are also held as a tenancy by the entireties. ²¹ The property passes to the surviving spouse if the other spouse dies. ²²

2. Limitations. Virginia law provides that property held as a tenancy by the entireties is not subject to the claims of one of the spouse's individual creditors. ²³ A creditor cannot enforce a judgment lien against an individual debtor who holds property as a tenant by the entireties until the debtor no longer holds the property as a tenant by the entireties. ²⁴

When a debtor declares bankruptcy, his or her undivided interest in any property held as a tenant by the entireties becomes property of

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the bankruptcy estate. ²⁵ A married couple filing a joint Chapter 7 bankruptcy petition can claim their home as exempt when all other creditors, aside from their mortgage holders, are individual creditors. ²⁶

Practice Note: It is not uncommon for unmarried debtors to present themselves as married within the community, and even to their families. Debtor's counsel should inform clients that an actual marriage is necessary to claim an entireties exemption.

Personal property can be held in a tenancy by the entireties. ²⁷ Proceeds from the sale of real property held as tenants by the entireties remain property held by the married couple as tenants by the entireties. ²⁸ Spouses can also place tenancy by the entireties property into joint or separate irrevocable trusts so that the beneficial ownership of the property can be divided unequally between the spouses. ²⁹

It is important to note, however, that the Virginia certificate of title law expressly prohibits motor vehicles from being held in a tenancy by the entireties. ³⁰ Joint accounts in Virginia financial institutions may be established with survivorship but not as a tenancy by the entirety. ³¹

3. Loss of Tenancy by the Entireties Status.

a. Divorce. An individual debtor's interest in a tenancy by...