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When a bankruptcy petition is filed, an estate is created. This is known as the “bankruptcy estate”. “Property of the estate” is the term used by the Bankruptcy Code to define what types of property constitute the estate created by the bankruptcy filing.
With certain exceptions, property of the estate consists of “all legal or equitable interests of the debtor in property as of the commencement of the case”. This includes almost every type of property that a debtor owns or that a debtor has a right to, including personal property, real estate, motor vehicles, bank accounts, etc. as of the date of the bankruptcy filing. Tax refunds not yet received are also included in property of the estate. In addition, the debtor’s rights in a cause of action, e.g., for personal injury, or for money owed to the debtor, are property of the estate.
There are many exemptions that protect the debtor’s property from coming into the bankruptcy estate. Read more about property exemptions.
Property of the estate generally consists of property interests that the debtor has as of the date of the bankruptcy filing. However, there are some important exceptions to this rule. The following property interests becomes property of the estate if the debtor acquires, or becomes entitled to acquire them, within 180 days after the filing of the bankruptcy case:
Also considered to be property of the estate are the proceeds, rents, or profits from property of the estate. This could include rental income from a building owned by the debtor, or income produced by a business owned by the debtor.Read more about bankruptcy for small business owners.
What constitutes property of the estate is the same in both Chapter 7 and Chapter 13, with two important distinctions. In Chapter 13, property of the estate also includes property that the debtor acquires after commencement of the case, as well as earnings from services performed by the debtor after commencement of the case. Earnings from services performed by an individual debtor after the commencement of the case are not property of the estate in Chapter 7.
Another major difference is that in Chapter 7, the bankruptcy trustee can take control of non-exempt assets, while in Chapter 13, the debtor remains in possession of all property of the estate. Thus, Chapter 13 may be a viable alternative for debtors who have non-exempt property that they want to keep. Read more about the differences between Chapter 7 and Chapter 13.
When a bankruptcy petition is filed, the debtor is required to list all of his or her assets. How is property valued for bankruptcy purposes? This depends on the type of property.
For real estate, the debtor should obtain, at a minimum, a Zillow estimate of the property. However, a written broker’s price opinion, or an actual appraisal, will provide a more detailed and accurate estimate of the property’s value. This is especially important if the equity in the property is near the limit of the debtor’s homestead exemption, or if the debtor will be attempting to avoid a judgment lien or strip a second mortgage lien.
Life Estates/Remainder interests in property and bankruptcy
It is not uncommon for a debtor to own a house that is subject to a “life estate”. This is often done for estate planning purposes. In this situation, the debtor is given ownership of the property, usually by a parent. However, the deed to the property will provide that the parent has the right to remain in possession of the property for their lifetime. Upon the parent’s death, the debtor would then own the property free of the life estate. This ownership interest is known as a “remainder interest”. Often, more than one sibling will be given a remainder interest in the property.
How is the debtor’s “remainder interest” valued? To do so, it is of course necessary to know the value of the property itself. Actuarial tables, based on the age of the parent, can then provide the present value of the remainder interest. The older the parent, the more valuable the remainder interest would be. This remainder interest can be sold by a Chapter 7 bankruptcy trustee. However, bankruptcy courts in New York have ruled that if the property is the debtor’s primary residence, the debtor may utilize the homestead exemption to protect their remainder interest in the property.
What happens if the holder of the “life estate” files for bankruptcy? Can the debtor’s interest in the life estate be sold by a Chapter 7 bankruptcy trustee? The answer is yes. However, the value of the life estate is protected by the New York homestead exemption. The value of the life estate declines as the age of the life estate holder increases. So, while it is unlikely that the value of a life estate would exceed the homestead exemption (up to $165,000 depending on the county of residence), debtors with life estates should consult with a bankruptcy attorney if considering a Chapter 7 bankruptcy filing.
Most household goods, clothing, used electronics, etc., are worth far less than what the debtor paid for them. These categories of property should be valued at their “garage sale” value. Bankruptcy trustees rarely inquire into the details of such items, as they are almost always worth less than the debtor’s exemptions in such property. Valuable items of property, such as expensive jewelry, should be appraised before a Chapter 7 bankruptcy is filed. This way, the debtor will know beforehand whether they can protect the property with available exemptions, so as not to risk having the property sold by a bankruptcy trustee.
Cars and trucks should be listed at their “Blue Book” value, using an average of the wholesale and private party values. It is important to obtain an accurate estimate, based on the specific vehicle trim and options. The value of a particular vehicle model can vary widely depending on the options, engine type, etc. The mileage and condition of the vehicle are also important. If the vehicle requires substantial mechanical repairs or body work, the debtor should obtain an estimate of the cost of the repairs. If necessary, an appraisal of the vehicle can be obtained by the debtor. This may be helpful when a vehicle’s condition substantially reduces its value.
Long Island bankruptcy attorney Andrew M. Doktofsky can advise you on how you can protect your assets when filing for bankruptcy. Call (631) 673-9600 to schedule a free bankruptcy consultation. Andrew M. Doktofsky represents clients throughout Long Island, New York, in both Nassau and Suffolk Counties.