8. What assets of the debtor are included in the bankruptcy estate?
The assets of the bankruptcy estate include all legal and equitable interests of the debtor in property at the commencement of the bankruptcy case. A legal interest means any legal right to the exclusive use and enjoyment of the property. An equitable interest includes any rights or claims to the ownership of property based upon principles of fairness. So, if a debtor has the ability to make a valid demand or claim for ownership rights in property, that property becomes part of the bankruptcy estate. This may include rights to sue or collect debts from others. Property of the estate also includes property that the debtor acquired within 180 days of filing for bankruptcy if acquired with proceeds or profits from property of the estate. Property excluded from the estate includes any income derived from the services of the debtor performed after the filing for bankruptcy protection, equitable powers that the debtor may exercise for others, educational IRA plans, 529 plans, and certain ERISA qualified retirement plans.
Federal bankruptcy law allows for certain exemptions of property from the estate based upon state law. State statutes regarding what constitutes a property interest of an individual is generally determinative of whether property indeed belongs to the debtor. Certain agreements will attempt to thwart the provisions of the bankruptcy code by limiting the transfer of property to debtors or divest debtors of ownership in property upon the filing of bankruptcy. These agreements are generally ineffective to prevent such property from becoming property of the bankruptcy estate.
• Note: An important state statute regarding exempt property from a bankruptcy estate regards the value of a homestead (or real property) exemption.
• Discussion: How do you feel about the type of assets included in the bankruptcy estate? Why do you think certain assets are excluded from the estate? Why do you think the federal bankruptcy law follows state law with regard to the assets that are exempt from the bankruptcy estate? What effect might this have on a debtor’s choices when filing for bankruptcy protection?
• Practice Question: Doug is involved in a vehicle accident with Harry. Harry is driving a $1 million Lamborghini sports car. Harry sues Doug and receives a $1 million judgment. Doug has no other debts, but he decides to file for a chapter 7 liquidation bankruptcy. Doug’s only assets are an educational IRA and his home, which is worth $500,000 and is not subject to a lien or security interest. How will Doug’s bankruptcy filing affect Harry’s claim against him? What will determine whether Harry receives any money for his claim against the bankruptcy estate?