The “bankruptcy estate” describes the assets of the person who filed bankruptcy. Any payments to creditors come from the estate.
When a bankruptcy case is filed, all of the debtor’s property comes into the bankruptcy estate. The debtor can extract assets from the estate by way of claims of exemption.
The overwhelming percentage of bankruptcy cases are “no asset” cases. These are cases in which there are no non-exempt assets at all, or the non exempt assets have too little value to merit sale and distribution.
The Bankruptcy Code defines “property” very broadly as all legal and equitable interests of the debtor and anything that is community property of the debtor and his spouse. 11 U.S.C. 541.
Even the assets that the debtor selects as exempt property are “property of the estate” until the exemption claims are final (generally 30 days after the 341 meeting).
In addition to the obvious and tangible assets of the debtor, the estate also includes such things as
- the right to file a lawsuit;
- stock options;
- the right to inheritances received within 6 months after the bankruptcy is filed;
- tax refunds for prepetition years and intellectual property and even
- tax attributes such as loss carryforwards.
The Bankruptcy Code gives the trustee the right to recover property that was improperly transferred away by the debtor or that was taken by creditors shortly before the case was filed.
The most important exceptions to the all encompassing definition of property of the bankruptcy estate are the debtor’s rights in spendthrift trusts and in ERISA qualified retirement plans and 401K plans; those are not “property of the estate”.
Social Security, most courts say, is also not property of the estate.
If an asset is not part of the estate, the debtor does not have to claim it exempt to protect it from creditor claims: it is, by definition, beyond the reach of creditors and the trustee.
When it leaves the estate
When an exemption has become final, or when the property is abandoned by the trustee, it loses its character as property of the estate.
Why do trustees abandon assets? Stuff is abandoned when its net value to the estate is minimal or less than the costs of liquidating it or when the tax burden triggered by a sale would exceed the available sale proceeds.
Abandonment occurs either on motion during the case, or at the conclusion of the case, by operation of law. Any property listed in the schedules that the trustee does not administer (sell) is deemed abandoned upon the closing of the case.