Filing a Bankruptcy Petition Creates a Bankruptcy “Estate”
When a debtor files a bankruptcy petition, an “estate” is automatically created. This estate generally includes all the debtor’s assets at the time the bankruptcy petition is filed. 11 U.S.C. § 541(a). This is also sometimes referred to as the bankruptcy estate.
Why is the Bankruptcy Estate Important?
The reasons for the bankruptcy estate’s importance change depending on the Chapter under which a debtor files for bankruptcy. Most individual debtors will be filing under Chapter 7 or Chapter 13, so this article will focus on those two.
The Bankruptcy Estate and Chapter 7
Chapter 7 of the Bankruptcy Code is titled “liquidation.” This title is descriptive and spot on. When an individual debtor files for bankruptcy under Chapter 7 the “property of the estate” is collected by the bankruptcy trustee and then sold, or “liquidated.” The proceeds from these sales are then distributed to the debtor’s creditors. 11 U.S.C. §§ 704 & 726. Because the debtor loses all property which is included in the bankruptcy estate, the bankruptcy estate is an extremely important concept for individual debtors filing a bankruptcy under Chapter 7.
The Bankruptcy Estate and Chapter 13
When a debtor files for bankruptcy under Chapter 13, they generally retain possession of the property of the estate, but the use and sale of this property is supervised by the Bankruptcy court. 11 U.S.C. 363. Therefore, the property included in the estate restricts the debtor’s ability to use and sale that property.
Property of the estate is extremely important in Chapter 13 for another reason. Under Chapter 13, the value of the property in the estate determines the minimum amount a debtor must offer to pay unsecured creditors. 11 U.S.C. § 1325(a)(4). As such, even if an individual debtor files for bankruptcy under Chapter 13 and retains possession of his or her property, the more property included in the estate means the more money the debtor must offer to pay unsecured creditors.
What is Included in Property of the Estate?
The general rule is that all of an individual debtor’s property becomes property of the estate, with very limited exceptions. 11 U.S.C. § 541. This article will not focus on the various rules affecting what is included in the property of the estate. That is a complex issue that is best afforded its own article. This article will focus on what property an individual debtor is able to exempt from being included in the bankruptcy estate when filing for bankruptcy in Oklahoma.
What is a Bankruptcy Exemption?
The general rule in bankruptcy is all property in which a debtor has an interest when filing a bankruptcy petition becomes property of the estate. However, some property is subject to an “exemption.” When property is subject to an exemption it can be precluded from being considered property of the estate. This means the debtor is allowed to keep property out of the bankruptcy estate, when the property would otherwise be included. Bankruptcy exemptions are only available to individual debtors.
Why is a Bankruptcy Exemption Important?
When property is subject to an exemption, the individual debtor can keep that property from becoming property of the estate. While this is an extremely important concept for an individual debtor no matter which Chapter the case is filed under, the reasons for this importance vary depending on the Chapter.
Bankruptcy Exemptions and Chapter 7
As discussed above, in a Chapter 7 case, all property of the estate is collected by the bankruptcy trustee. The bankruptcy trustee then sells the property of the estate, distributing the proceeds to the debtor’s creditors. The more property an individual debtor can exclude from the estate means the more property the debtor is allowed to keep, while still receiving a discharge of his or her debts. In this way, bankruptcy exemptions can be extremely important to an individual debtor filing under Chapter 7.
Bankruptcy Exemptions and Chapter 13
In a Chapter 13 case, an individual debtor is generally allowed to retain possession of the property of the estate. However, all property of the estate is subject to supervision by the Bankruptcy court, meaning all use or sale of this property must be permitted by the Bankruptcy court. Therefore, the less property included in the estate means the more property the debtor can use and sell without oversight.
Bankruptcy exemptions are also extremely important in Chapter 13 because the value of the property of the estate is used to determine the minimum amount an individual debtor must offer to pay unsecured creditors. When property is excluded from being considered property of the estate, the property’s value won’t be considered when calculating the minimum amount. The more property an individual debtor can exclude from the estate means the less money the debtor must offer to pay unsecured creditors. In this way, bankruptcy exemptions can be just as important in Chapter 13 as they are in Chapter 7.
While this article attempts to provide a general overview of why bankruptcy exemptions are important, this article is no substitute for advice from an Massachusetts bankruptcy attorney. Every debtor’s situation is unique, and most general rules have exceptions which might apply in the debtor’s case. It is in a debtor’s best interest to discuss their situation with a Massachusetts bankruptcy attorney before deciding whether to file for bankruptcy in Oklahoma.