WHAT IS THE PROPERTY OF THE ESTATE IN BANKRUPTCY
Many divorcing couples also have financial problems leading to Bankruptcy.
A. Included Property
11 USC 541 sets forth what is and what is not property of the bankruptcy estate. Generally, the bankruptcy estate consists of everything—“all legal or equitable interests of the debtor in property as of the commencement of the case”—with certain exceptions. Property of the estate also includes the following:
- interests in property recovered by the trustee or debtor
- interests in property preserved for the benefit of or ordered transferred to the estate
- inheritances, property settlements, or life insurance policies if entitled to receipt within 180 days of the petition date
- proceeds of estate property
- funds contributed to 11 USC 529 educational plans over a certain amount
- undivided co-ownership interests
Posted here by Flint Bankruptcy / Divorce Attorney Terry Bankert 235-1970. See Http://www.attorneybankert.com
Property becomes estate property even if there are transfer restrictions on it or if the applicable agreements contain conditions related to the debtor’s insolvency or financial condition, or the commencement of a bankruptcy case (so called ipso facto clauses). However, the estate may not possess an interest greater in the property than the debtor had at the start of the case. In a Chapter 7 case, the bankruptcy trustee must administer all property of the estate by selling, or otherwise liquidating it if it can be liquidated, and reducing claims and causes of action to judgments that can be collected. Any property that is held by others, either wrongfully or not, must be brought into the bankruptcy case (by agreement or order) and be administered.
Timing also plays a role in whether certain assets are considered part of the estate. If a debtor becomes entitled to a divorce settlement, bequest, devise, inheritance, or the proceeds of life insurance within 180 days of the filing, these assets become property of the estate.
Importantly, exempt assets, §17.7, constitute property of the bankruptcy estate at the start of the case.
B. Excluded Property
Items excluded from property of the estate are different from exempt assets because exempt assets are still part of the estate where excluded items never become part of the bankruptcy estate. Excluded items include the following:
- postpetition earnings of the debtor in a Chapter 7 case (although these earnings are included in a Chapter 11, 12, or 13 case)
- in general, property acquired postpetition (subject to exceptions noted in §17.5)
- property held for the benefit of the debtor in a trust that restricts transfer
- any power the debtor may exercise solely on behalf of someone else
- any interest of the debtor as a lessee under a lease of real property (not residential) that expired before the case or that expires during the case
- eligibility to participate in programs authorized under the Higher Education Act of 1965
- certain interests of the debtor in liquid or gaseous hydrocarbons
- funds placed in an educational individual retirement account or 11 USC 529 plan account in the 365 days before the petition, up to $5,475 of funds placed into the account between one and two years before the petition, and everything placed into the account more than two years before the petition
- amounts withheld and placed into an Employee Retirement Income Security Act of 1974 (ERISA)-regulated employee benefit plan, deferred compensation plan, or tax-deferred annuity
A full list of the items that are not included in property of the estate is found in 11 USC 541(b)(1)–(8). A divorcing client should contact bankruptcy counsel to determine the effect of these exemptions on divorce proceedings.
Michigan Family Law ch 17 (Hon. Marilyn J. Kelly et al eds, ICLE 7th ed 2011), at
http://www.icle.org/modules/books/chapter.aspx/?lib=family&book=2011553510&chapter=17
(last updated 12/16/2011).
