Chapter 3 Your Property and Bankruptcy

• Library: How to File for Chapter 7 Bankruptcy (Nolo) (2022 Ed.)

CHAPTER 3 Your Property and Bankruptcy

Property in Your Bankruptcy Estate

Property You Own and Possess

Property You Own but Don't Possess

Property You Have Recently Given Away

Property You Are Entitled to Receive but Don't Yet Possess When You File

Proceeds From Property of the Bankruptcy Estate

Certain Property Acquired Within 180 Days After You File

Your Share of Marital Property

Property That Isn't in Your Bankruptcy Estate

Property You Can Keep (The Exemption System)

How Exemptions Work

Applying Exemptions to Your Property

Selling Nonexempt Property Before You File

Five Guidelines for Prebankruptcy Planning

This chapter explains what happens to your personal property when you file for Chapter 7 bankruptcy. First, we explain what property is subject to the reach of the bankruptcy court. Next, we cover exemptions: state and federal laws that determine what property you can keep when you file for bankruptcy. Happily, most people find that they can keep virtually all or most of their personal property through the bankruptcy process.

If some of your property is not exempt, you might be able to "buy it back" by paying the trustee a discounted price, or sell it and use the proceeds for necessities. Selling nonexempt property and purchasing exempt property is risky, but it can be done in some cases. Below, we offer suggestions—and important cautions—if you want to try this.

RELATED TOPIC

More information on homes and collateral. This chapter covers personal property only, not real estate. If you own your home, Ch. 4 explains how to figure out whether you'll be able to keep it. And, if you own personal property that serves as collateral for a debt, that property is handled a bit differently. The special rules for these debts (called "secured" debts) are explained in Ch. 5.

Property in Your Bankruptcy Estate

When you file for Chapter 7 bankruptcy, almost everything you own when you file becomes subject to the bankruptcy court's authority. The exceptions listed in "Property That Isn't in Your Bankruptcy Estate," below, include pensions, tuition and individual education accounts, and, if you are filing alone, property you own with a spouse as tenants by the entirety.

All property subject to the court's jurisdiction is collectively called your "bankruptcy estate." In addition to the property you own when you file, your estate also includes property you used to own but improperly transferred to someone else. Property you acquire after filing isn't part of your estate, although exceptions apply to a few assets acquired within six months after filing.

The trustee is very interested in your bankruptcy estate because he or she is entitled to a commission on any property that can be taken from your estate and sold to come up with some money for your unsecured creditors. Only property from which the trustee can realize a profit will be sold; you won't lose property worth very little or protected by an exemption.

Using the Information in This Chapter

This chapter will help you:

• Decide whether bankruptcy is in your best interest. Knowing what you own and how much you can get for it will help you decide whether to file for Chapter 7 bankruptcy. It might be easier simply to sell off some property and pay creditors directly rather than to go through bankruptcy—especially if you would have to give up the property if you filed for bankruptcy.
• Determine what property you can keep. You'll be able to keep some property no matter how much it is worth. However, your right to keep many types of property in bankruptcy often depends on the value of your equity. For instance, many states allow you to keep a car, but only if your equity is less than a certain amount. Vehicle exemptions can range from $1,000 on up depending on the state you live in. If you own considerably more equity than what you can protect with an exemption, you will have to turn the car over to the trustee to be sold or "buy it back" by paying the trustee the equivalent value in cash or other exempt property. If the trustee sells the car, you'll get your exemption amount and your creditors will get the rest.
• Summarize information about your property before you file. If you decide to file for bankruptcy, you'll need to fill out forms listing the property you own, how much it's worth, and what you claim as exempt. The work you do in this chapter can be transferred to those forms.

If You Convert From Chapter 13

If you originally filed for Chapter 13 and convert your case to Chapter 7, your Chapter 7 bankruptcy estate consists of everything you owned when you filed Chapter 13 as long as you still own it when you convert to Chapter 7. In one case, a trustee required debtors who converted from Chapter 13 to Chapter 7 to hand over their clothes, $3,660 worth of personal property, and their family dog, all of which were classified as "nonexempt" in their Chapter 13 paperwork. (In re John, 352 B.R. 895 (Bankr. N.D. Fla. 2006).) This happened because the debtors did not claim the right to exempt this property when they filed for Chapter 13. If you find yourself in this situation, consult with an attorney. He or she can ask the court to allow you to keep your property because relinquishing it would cause you hardship.

If you convert your case in bad faith, your Chapter 7 bankruptcy estate will include all property of the estate as of the conversion date.

Property You Own and Possess

Property that you own and possess—for example, clothing, books, computers, cameras, TV, iPods, cellphones, furniture, tools, car, real estate, boat, artworks, and stock certificates—is included in your bankruptcy estate.

Property that belongs to someone else is not part of your bankruptcy estate—even if you control the property—because you don't have the right to sell it or give it away. However, you will have to disclose all property you hold on behalf of someone else in your paperwork. Here are some examples.

EXAMPLE 1: A parent establishes a trust for her child and names you as trustee to manage the money in the trust until the child's 18th birthday. You possess and control the money, but it's solely for the child's benefit under the terms of the trust; you cannot use it for your own purposes. It isn't part of your bankruptcy estate.

EXAMPLE 2: Your sister has gone to Zimbabwe for an indefinite period and has loaned you her computer while she's gone. Although you might have use of the equipment for years to come, you don't own it. It isn't part of your bankruptcy estate.

EXAMPLE 3: You are making monthly payments on a leased car. You can possess the car as long as you make the monthly payments, but you don't own it. It is not part of your bankruptcy estate (but the lease itself is).

EXAMPLE 4: Your name appears on the title and note to your son's car because he was underage when he bought it. Your son makes all the payments. While the two of you probably consider the car to "belong" to your son, the bankruptcy laws initially consider it to be yours. You can explain that you have "bare legal title" and your son is the equitable owner, which means it shouldn't be considered part of your bankruptcy estate. However, the court could disagree and your son could lose the car unless it fits within an available exemption. Courts have gone both ways on this issue; you should talk to a lawyer if valuable property is at stake.

Property in a Living Trust

A revocable living trust is a popular estate planning tool in which the grantor puts property in trust to be managed by the trustee for the benefit of one or more beneficiaries. The trust is revocable because the grantor can change his or her mind and revoke it at any time.

If you are both the grantor and the trustee of a revocable living trust, property in the trust is considered property of your estate, even though, as a technical matter, the trust "owns" the property. However, if the trust is irrevocable, that is, you can't change your mind and dissolve the trust, property in the trust won't be considered part of your bankruptcy estate, unless the court finds that you created the trust to shelter the property from your creditors or that you improperly transferred the money or assets into the trust.

Property You Own but Don't Possess

Any property you own is part of your bankruptcy estate, even if you don't have physical possession of it. For instance, you might own a share of a vacation cabin in the mountains but never spend time there. Or you might own furniture or a car that someone else is using. Other examples include a deposit held by a stockbroker, stock options, contractual rights to a royalty or commission, or a security deposit held by your landlord or the utility company.

Property You Have Recently Given Away

People contemplating bankruptcy are often tempted to unload their property on friends and relatives or pay favorite creditors before they file. Don't do it. Property given away or paid out in anticipation of filing for bankruptcy is still part of your bankruptcy estate—and in most cases, the trustee has the legal authority to take it back.

Prefiling Transfers of Property

Certain types of actions you take before filing for bankruptcy have such serious consequences that, as a practical matter, they render you ineligible to file for bankruptcy for a period. For example, if you sell or give away property during the two-year period immediately before you file, you will have to disclose those transactions on your bankruptcy papers. The consequences can be very severe—from losing the property to having your whole case thrown out—if the trustee decides that the transfer was fraudulent and the court agrees.

The basic problem here is that some filers are tempted to unload their assets so the trustee won't take them, sell them, and distribute the proceeds to the creditors. These transactions often take the form of selling property to a friend or relative for a nominal amount (such as a dollar), with the understanding that the friend will give...