Your Assets and the Timing of Filing a Chapter 7 Case

Wasson and ThornhillChapter 7

Your assets owed at the filing of a Chapter 7 case are “property of the bankruptcy estate.” Later-acquired assets are not.

 

Chapter 7 Timing

In our last blog we talked about the importance of the timing of your Chapter 7 “straight bankruptcy” case filing. We looked specifically at “pre-petition” vs. “post-petition” debts. Pre-petition debts are those that existed at time of your bankruptcy filing and so are included in the case. Post-petition debts did not exist until after filing and so are not included.

There is a similar distinction between your pre-petition and post-petition assets.

Pick a Point in Time

A Chapter 7 bankruptcy case is a financial snapshot in time. The bankruptcy system has to pick a specific time to look at your financial life, including your assets, your property. That point in time is the moment you file your case.

“Property of the Estate”

That filing of your Chapter 7 case creates a bankruptcy “estate.” Think of this estate as a temporary legal person related to but separate from you. Everything you own at that point temporarily belongs to your bankruptcy estate.

So, pretty much everything you own pre-petition is “property of the estate.” Anything you earn or otherwise becomes yours after filing the case—post-petition—is not “property of the estate.”

You generally don’t actually lose possession of anything. The titles to your home or vehicle stay in your name. On the surface usually nothing changes. But legalistically your Chapter 7 trustee gains some potential control over your bankruptcy estate.

Exempt Property

In most Chapter 7 consumer cases the trustee never takes physical control over any of your assets. That’s because everything the debtor owns at the time of filing is “exempt.” Your Chapter 7 trustee has no right to it. That is, all of the property of the estate is exempt. It all fits within “exemptions”—categories of protected assets, and is all worth no more than the allowed dollar limits within each category.

For example, you have a vehicle worth $10,000, with a debt of $7,500, and so equity of $2,500. Assume that in your state your vehicle exemption is $3,000. All of that equity is exempt, and so you can keep the vehicle; the trustee has no right to it. (Vehicle and other exemptions vary from state to state. And you’d need to keep paying the vehicle lender to satisfy its lien.)

“No Asset” Chapter 7 Case

If everything is exempt, then, usually about a month after you and your Louisville bankruptcy lawyer file your case, your Chapter 7 trustee will announce that he or she has no legal interest in anything in your bankruptcy estate. This usually (but not always) happens at the “meeting of creditors.” (A 5-10 minute meeting with the trustee you attend with your lawyer.) The trustee usually declares, verbally or in writing or both, that the case is a “no asset” case. This means that the bankruptcy estate contains no available assets because everything is protected by the available exemptions.

“Asset” Chapter 7 Case

If your bankruptcy estate contains something that isn’t covered by an exemption, the trustee has the right to take that from you. The trustee usually will, but may choose not to do so, depending on a number of factors. For example, something may cost too much to take possession of and sell compared to the anticipated proceeds.

Assuming the trustee does want a non-exempt asset, you’ll either surrender it to the trustee or have your lawyer negotiate term for you to keep the asset. You would pay the trustee for the right to keep it.

Again, non-exempt assets occur in a minority of cases. And if you’ve been upfront with your lawyer about everything you own, this will not be a surprise to you.

After the trustee takes and sells your non-exempt asset or in effect sells it to you, her or she then pays the proceeds to your creditors.

Post-Petition Assets

Because post-petition assets are not in existence when you file your case, they are not property of your bankruptcy estate. The trustee has no control over or right to them.

Post-petition assets include a paycheck EARNED and received after your bankruptcy filing.  A paycheck earned BEFORE filing and not paid to you until afterwards is part of your bankruptcy estate. However, that paycheck may, as is often the case, be exempt and protected.

Post-petition assets also include gifts given to your after filing.

They include anything you purchase after filing, using money that’s either exempt or was earned post-petition.

Assets Received Post-Petition but Still Legally Pre-Petition

But careful about assets that you have a legal right to at the time of filing but do not get possession of until after filing. These are usually considered pre-petition assets and are included in your Chapter 7 case. Common examples include:

  • Tax refunds for tax years completed as of the time of filing, even if only paid to you later
  • Insurance proceeds for an accident or other incident that occurred before filing but only paid to you after filing
  • Litigation proceeds for a claim that existed pre-petition
  • Payment on a debt owed to you pre-petition but paid to you post-petition

Remember: your assets such as these are property of your bankruptcy estate but often can be fully, or at least partly, protected through exemptions.