What Is the Bankruptcy Estate?

what is the bankruptcy estate

The term “Bankruptcy Estate” is one that is thrown around a lot when you file for Chapter 7 or Chapter 13 bankruptcy in Michigan.

What is the Bankruptcy Estate? Do you have one? Will you get one if you file for bankruptcy in Livonia, Westland, Redford, Inkster, Farmington, Southfield, or elsewhere in Metro Detroit?

This Article will explain the concept of the so-called Bankruptcy Estate—and what it means to your Metro Detroit Chapter 7 or Chapter 13 bankruptcy case.

The Bankruptcy Estate Defined

You make think of an “estate” as something on which a member of the British Royal family resides. This may be true in that context. However, in the legal context, an “estate” refers to something much more difficult to locate on a map.

The legal definition of the term “estate” will vary slightly depending upon the sort of legal proceeding in which it is being discussed.

The most common legal estate with which non-lawyers in Michigan might be most familiar is the probate estate.

This sort of “estate” is created when a Michigan citizen passes away without leaving a will, or with a will that must be probated. The probate estate is created to capture the assets of the deceased person for purposes of determining who gets what—creditors or otherwise.

And that essentially sums up the legal definition of an “estate.” It is the total property owned by a person. It includes both “real” property (land) and “personal” property (everything else that isn’t land).

The Bankruptcy Estate is similar, conceptually.

It is the extended jurisdiction of the US Bankruptcy Court over all of the property owned or claimed to be owned by the debtor filing a Chapter 7 or Chapter 13 bankruptcy case.

The Bankruptcy Estate, in short, includes everything you own or have a claim against as of the date that you file your bankruptcy case in Detroit, Flint, Ann Arbor, Bay City, Lansing, or elsewhere in Michigan.

You create it upon the filing of a bankruptcy case by automatic function of Federal law.

What Is the Purpose of the Bankruptcy Estate?

The purpose of the Bankruptcy Estate is, as noted above, to place your assets within the jurisdiction of the US Bankruptcy Court when you file a Chapter 7 or Chapter 13 case.

Why is this necessary?

This is necessary because the value of your assets plays an enormous role in the bankruptcy process in the United States.

In particular, the value of your assets will ensure that your creditors are properly compensated where the law says that they must be.

The requirement of the US Bankruptcy Code that you disclose and value the assets of your Bankruptcy Estate also ensures that you are the “good faith debtor” entitled to a discharge under the Code.

The Bankruptcy Estate & the Good Faith Debtor

Keep in mind, first, that bankruptcy is a Federal legal process. It is not a legal process created by Michigan or other state statute. Instead, it exists because the US Constitution (very vaguely) provides for its existence. And because the US Congress, in response to that Constitutional provision, has drafted a number of Federal statutes over the past 200 years to formulate the legal bankruptcy process in the United States.

The current such statute—the US Bankruptcy Code—was enacted in 1978. It has been revised (for the worse) a number of times, most notably with 2005’s BAPCPA “bankruptcy reform” legislation.

The Bankruptcy Estate, however, has been a vital component of the Code since its original enactment in 1978.

The Bankruptcy Code and the Congressional Record of its enactment requires that the debt discharge available through bankruptcy is available only to “good faith debtors.”

This term has been infused with many meanings in Bankruptcy Court decisions (it is not defined in the Code itself), but, generally, it is the case that bankruptcy is intended for those who need it.

In particular, the Chapter 7 “complete discharge” that requires no repayment of any debt through the bankruptcy process is available only to those debtors whose income is low enough to pass them through the Means Test eligibility formula.

Likewise, the value of your assets will greatly affect the cost of your Chapter 7 or Chapter 13 process, albeit differently in each case.

If you own too much valuable stuff, you will not slide through the US bankruptcy process free of cost, one way or another.

The Bankruptcy Estate in Michigan Chapter 7 Bankruptcies

Chapter 7 bankruptcy is a “liquidation” bankruptcy.

That is, your debts are “liquidated” in that you need not repay them once you receive your discharge (with notable exceptions for debts such as child support and criminal penalties).

Chapter 7 bankruptcy is also a “liquidation” proceeding in that your assets are potentially subject to seizure and liquidation.

Don’t panic! Most people who file Chapter 7 bankruptcy in Michigan do not lose any property. But it is a possibility to be taken seriously.

When you file a Chapter 7 bankruptcy in Metro Detroit or elsewhere, you, as noted, automatically create a Chapter 7 Bankruptcy Estate.

The Bankruptcy Estate, as you’ve now guessed, contains everything you own and all claims you have to property or money. There is no item of property of so little value that it is excluded from the Bankruptcy Estate. Even the clothes on your back become assets of your Bankruptcy Estate when you file Chapter 7 bankruptcy.

When you file Chapter 7, a person called a Chapter 7 Trustee is automatically also assigned to your bankruptcy case. The Chapter 7 Trustee is the Trustee of your Bankruptcy Estate.

He or she has the authority to seize any “non-exempt” assets of your Bankruptcy Estate and sell them off in order to generate a pool of money from which your creditors may at least be partially repaid.

You can read more about the Chapter 7 Trustee here.

What does “non-exempt” mean, however?

Exempting Assets from the Bankruptcy Estate

Most people don’t lose any property when they file Chapter 7 because the US Bankruptcy Code does allow you to remove, or exempt, certain types of property from your Bankruptcy Estate.

These statutory “exemption” provisions were designed by Congress to allow normal households to retain the property necessary to obtain the “fresh start” promised by the Bankruptcy Code.

There are different exemptions for different types of property. Depending on the type of property involved, the exemptions have different dollar-value caps. Some types of property have no exemption protecting them at all.

For example, a tax-qualified retirement account such as a 401(k) or 403(b) account has a limitless exemption available. You can, in a Chapter 7 bankruptcy, protect 100% of your 401(k), even if it has hundreds of thousands of dollars of value. (Note that this is not legal advice: a high-value 401(k) may not be seized in a Chapter 7, but it’s presence could raise other “good faith” questions.)

Alternatively, a vacation property in the Bahamas has no exemption to protect it whatsoever.

If you (on paper, in your bankruptcy petition schedules) assign an exemption to an item of property and the value of the exemption exceeds the fair market (“garage sale”) value of the property—it is fully exempted.

That is, it has been removed from the Bankruptcy Estate.

The Chapter 7 Trustee has no authority to seize it as it has been removed from the jurisdiction of the US Bankruptcy Court.

The Bankruptcy Estate and Exemptions in Chapter 13 Bankruptcies

Assets are not liquidated in Michigan Chapter 13 bankruptcy cases. However, the Bankruptcy Estate remains in full force through that process.

A Chapter 13 bankruptcy is a reorganization bankruptcy. It is not a liquidation bankruptcy.

We will not discuss the Chapter 13 process in detail in this Article. (Read more about how Chapter 13 works here and the Chapter 13 Payment Plan here.)

What is important to note is that the Bankruptcy Estate serves a slightly different purpose in Chapter 13, as does the process of exempting assets.

While you are in Chapter 13 bankruptcy, which is potentially a 5-year-long process, you do not have the authority to liquidate the assets of the Bankruptcy Estate without court approval. The Chapter 13 Trustee retains authority over the assets of the Bankruptcy Estate through the full Chapter 13 process.

This includes “exempt” assets. Particularly real estate, which cannot be sold without court approval.

In Chapter 13, your assets are not subject to liquidation. However, unsecured creditors, who are paid last in priority in your Chapter 13 Payment Plan, must receive the value of any non-exempt assets.

If you have fully exempted all of the assets of your Bankruptcy Estate, there will be no minimum amount of money required to be paid to your unsecured creditors. (Exception: the Means Test sometimes requires such a minimum distribution for totally unrelated reasons.)

Your unsecured creditors may receive $0.01 to split amongst themselves. Bully for them.

However, if you have $10,000 in non-exempt assets, your monthly Chapter 13 Plan Payment must be large enough to pay your bankruptcy attorney’s fees, your Chapter 13 Trustee’s fees, your priority unsecured creditors—and still leave $10,000 for distribution to your unsecured creditors.

Non-exempt assets of your Bankruptcy Estate will make your Chapter 13 more expensive.

Consult an Experienced Detroit, Michigan Bankruptcy Attorney

If you are considering filing for bankruptcy in Livonia and elsewhere in southeast Michigan, it is essential that consult an experienced attorney if you are concerned about your assets.

A bankruptcy lawyer will be able to tell you at your initial consultation, in most cases, whether a specific lawsuit judgment vexing you will be dischargeable in bankruptcy or not.

Attorney John Hilla of The Hilla Law Firm PLLC has successfully represented hundreds of clients through Chapter 7 and Chapter 13 bankruptcy processes in Michigan.

Offering free, virtual consultations and friendly, one-on-one service from Livonia bankruptcy attorney John Hilla, we will ensure that your matter is handled properly, competently—and with kindness.

Click the button below to directly schedule your free consultation or contact us at (313) 380-0492.