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The Bankruptcy Estate: Putting It All Together
I thought estates were for rich (or dead) people, so what's a "bankruptcy estate"?
by Adam Mack, J.D.
Most of the time, when people hear "estate" they think of either a mansion or an "estate sale" in which the belongings of a deceased person are sold at auction. In the legal field, however, an estate is simply everything a person owns, whether that's real estate like a home or personal assets like a car or clothes. So a "bankruptcy estate" consists of everything you own at the time you file bankruptcy, plus a few quirky other things. As part of the bankruptcy process, the assets in your bankruptcy estate are used to pay off your creditors.
The "Quirky Things"
When you file bankruptcy, the court looks at your financial transactions for the last several months and, if you've made sufficiently high payments to any creditors in the 90 days prior to filing your bankruptcy, then in many circumstances the court can order the creditors to return the money. That money then becomes part of the bankruptcy estate.
Thanks to the federal and state laws that govern bankruptcy, you can choose to "exempt" some things from the bankruptcy estate (within certain guidelines). So depending on your circumstances and the exemptions available to you, things like cars, clothes, furniture, and pets can often be excluded from your bankruptcy estate. Important Note: these assets can only be exempted from the bankruptcy estate if you tell the court you have them, so it's important to list all of your assets in your bankruptcy petition.
So What Happens to the Bankruptcy Estate?
In a Chapter 7 Bankruptcy, the court appoints a bankruptcy trustee to oversee your bankruptcy estate. The trustee will then gather together all the non-exempt assets he or she is allowed to administer. Once the trustee has gathered together everything into the bankruptcy estate, the trustee then liquidates any tangible assets and distributes the money among your creditors based on predefined federal guidelines. Once that's done, most if not all of your debts are discharged, meaning that legally it's the same as if you had paid them off in full even though the creditors only receive a fraction of what you owe them. (Some debts can't be discharged, many of these debts are called priority debts. They include things like tax debts, maintenance [aka alimony] and child support.)
In a Chapter 13 Bankruptcy you are generally allowed to keep non-exempt assets if you so choose. However, the Court will generally require you to pay the cost of the asset (less the cost of administering the asset had you filed a Chapter 7 Bankruptcy, aka the 'Best Interest of the Creditors Test'). If you do not want to pay the extra expense to keep your non-exempt assets, then generally you will be required to surrender that property.
Sometimes people have so few assets that, after exempting everything they're allowed to, there is nothing left in the bankruptcy estate. If that's the case, don't worry. Your non-priority debts can usually still be discharged.
Bankruptcy has a two-fold purpose: to give you a fresh start and to give the creditors their fair share of what's left. The bankruptcy estate is just part of that process. Exemptions let you keep the things you need for your day-to-day life by excluding them from the bankruptcy estate, while everything else goes into the estate for distribution to your creditors. If you'd like a fresh start, contact an attorney who can help guide you through the process.