Under the U.S. Bankruptcy Code, when a person files for a Chapter 7 bankruptcy, a debtor’s legal and equitable interests in property become part of the debtor’s estate. The bankruptcy trustee will evaluate and sell off the debtor’s assets and disperse the proceeds to creditors. (See also Debtor Appraisal of Property for Bankruptcy).
Legal Interests in Property
A legal interest in property is limited to legal title, without actual rights of ownership. When person has title to a house, but does not actually own it, that person has a legal interest in the house. A person holding a joint bank account for the exclusive benefit of someone else amounts to a legal interest. Likewise, a debtor can also have an legal interest as the trustee of a trust.
Equitable Interests in Property
If a person owns property, regardless if they presently hold title to the property, then they have an equitable interest in property. A debtor that is the beneficiary of a trust has a equitable interest in the trust itself. Typically, if a non-debtor has an equitable interest in a portion of the debtors estate, the trustee will typically refrain from selling the item. After all, why should the trustee sell something that the debtor doesn’t actually own?
Future Acquisitions
Another important note is that many kinds of property acquired after debtor files for bankruptcy are not considered to be part of the debtor’s estate. But there are exceptions. For instance, under the U.S Bankruptcy Code, any property or money inherited or received as part of a divorce settlement within six months after the filing of a bankruptcy case becomes part of the debtor estate. Furthermore, if a rental property is part of the debtor estate, then the rent income from that property, even after the filing of bankruptcy case, becomes part of the debtor’s estate.
Exemptions
Just because a property interest initially becomes part of the debtor’s estate does not mean that it will be sold off. In a Chapter 7 bankruptcy, there are exemptions. Many states allow a debtor to retain an interest in their home, their car, tools of their trade and personal items and effects. The reasoning behind such exemptions is that a debtor should not be rendered homeless, or unable to travel to or perform their job.
The Need to Obtain Counsel
When a person seeks to discharge their debt via bankruptcy, there may be confusion or a misunderstanding of what property is subject to being taken and sold. Although the bankruptcy trustee is responsible for evaluating the debtor’s estate, a qualified bankruptcy lawyer can ensure that the process is fair to their client. Moreover, with professional legal advice, someone can decide whether bankruptcy is necessary and if so, to understand what property interests are at stake.
