Mississippi Consumer Help Blog
A bankruptcy estate is the entirety of assets or property rights that can be administered by the court in a bankruptcy case. The estate is created once a bankruptcy case is filed, and it includes all interests of the debtor in any kind of property.
Essentially this means that when a bankruptcy is filed, a debtor must list all the property they own or have an interest in. They must list assets such as real estate, vehicles, household goods, financial accounts, inheritances, businesses, potential active lawsuits they have against someone else, royalties, income, settlements, insurance funds, retirement accounts, tax refunds, and much more.
A debtor must list all their assets or potential assets in a bankruptcy case to ensure the court is fully aware of all property they own or have an interest in. However, just because the debtor must list all these types of property, does not mean they lose their property.
Bankruptcy has what are called exemptions that are governed by state laws. Exemption is what we refer to as the protections for certain property that a debtor can keep and retain through a Chapter 7. Once a debtor lists all their assets in their paperwork, they get to abide by the laws of the state where they filed and protect certain property from the bankruptcy court and trustee. The exemptions allowed in each state may determine what type of bankruptcy a debtor may file if they want to keep.
You may have heard some Chapter 7 cases referred to as a “no-asset case.” A no-asset case does not mean that a debtor owned or had an interest in nothing. It means that the debtor listed all their assets and interests in their paperwork, but state law helped exempt / protect those assets from being taken by the trustee and used to pay unsecured creditors. In an “asset” Chapter 7, the debtor would have non-exempted / unprotected property that the trustee can take and use to pay towards unsecured creditors that would generally be eliminated (or discharged) by the bankruptcy case.
For example, in Mississippi, your homestead equity, or equity of the home you physically reside in, is protected up to $75,000.00. If a debtor owned a single-family home, that was worth $100,000.00 and they had a mortgage totaling only $25,000.00, they would have equity of $75,000.00 and it would be exempted, and the Trustee could not take it. However, that homestead exemption only applies to your physical residence and if that same debtor had another home, the trustee could take possession of that home, sell it, and use any profits to pay towards the debtor’s unsecured debt.
Have no fear because there are ways to protect property that has no exemptions and is at risk of being taken by a Chapter 7 trustee, such as filing a Chapter 13 case instead. You must always be completely honest and upfront when speaking to your bankruptcy attorney so they can help you navigate all the exemptions and potential issues. Please speak with a bankruptcy attorney before you attempt to get rid of property if you want to file bankruptcy. An attorney can explain the consequences along with other options to help you keep non-exempted property. You never want to panic and start to transfer your property to other people because it is fraudulent, and not only can the court reverse the transfer they can deem it fraudulent and pursue criminal action. Always keep your property as is and discuss everything with a bankruptcy attorney first as they can help you determine which bankruptcy to file and how it would affect your assets.
Previously mentioned, filing a Chapter 13 can help you protect non-exempt assets that would be taken by a Chapter 7 trustee. A Chapter 13 is a reorganizational plan that can be up to 5 years. When a debtor has property with no exemptions that apply, they can file a Chapter 13 to retain that property by paying the value or equity of that property over time in the plan to their unsecured creditors.
If we take our previous example of the debtor who has a second home that is unprotected, if that debtor filed a Chapter 13, there is a way they can retain that extra home. Let’s say that second home is paid off and worth $50,000.00. Rather than filing a Chapter 7, where the Trustee would take and sell that property to pay unsecured debts, the debtor files a Chapter 13 to retain it. A Chapter 13 trustee would not attempt to take the property but would have the debtor pay the value ($50,000.00) over a 5-year plan towards their unsecured creditors. A Chapter 13 can be a “pay to protect” type of bankruptcy where you can keep the unprotected property, and your unsecured creditors are treated fairly.
The purpose of bankruptcy is a fresh start for the debtor and equity among creditors. The debtor with two homes can choose to keep his second home and pay unsecured creditors over time in a Chapter 13 or he can choose to file a Chapter 7 and have them paid quicker and be done with his bankruptcy sooner. In either situation, his unsecured creditors are treated equally. If the debtor did not have a second home, then there would be nothing to pay towards unsecured creditors because he utilized his exemptions and does not have to pay unsecured creditors anything.
Even though bankruptcy is in Federal Court, each state sets up their own exemption laws of what types of property and interests can be retained and protected. There are also exemptions set up by Federal law that can be used if a state chooses to allow it. It is important to speak with a bankruptcy attorney to be aware of all of your exemptions and options so you can utilize the right bankruptcy to help match your goals while staying within the law.