Written By: William P. Kain
When a person with financial problems files a Chapter 7 Bankruptcy case, the effect of filing the case is to create something called the bankruptcy estate. Section 541 of the Bankruptcy Code tells us what the bankruptcy estate is. Section 541 begins “the commencement of a case under section 301, 302 or 303 of this title creates an estate.” Section 301 of the Bankruptcy Code is for Voluntary Bankruptcy cases, section 302 is for joint (that is, married couple) cases, and section 303 is for involuntary cases. Section 541 continues, defining the bankruptcy estate as being composed of “all legal or equitable interests of the debtor in property as of the commencement of the case.”
It is this property that the bankruptcy case trustee is entitled to administer. If for some reason the bankruptcy trustee is not able to access property in administering the bankruptcy estate, the trustee can ask the bankruptcy court to order the debtor to “turn over” the property to the trustee. Turnover Motions are little land mines on our clients’s journeys to a bankruptcy discharge. It is good for clients to know about what happens if property is not turned over to the bankruptcy trustee ahead of filing a case, so the client has a clear idea of the need to cooperate with the trustee in collecting and administering the bankruptcy estate.
In order to understand this, clients need to understand what property of the estate is.
So what does it mean when the law says the Property of the Estate is made up of the “legal interest” of the debtor in property? Well, legal interest has been interpreted to mean that the debtor has some sort of ownership interest in property. And property has been interpreted very broadly, to include real and personal property, tangible and intangible property and “all other forms of property.” Bankruptcy courts have been clear that the definition of property is broad, and simply because the property in question – or the theory of ownership of the property might be novel, the property in question can still very well be property of the bankruptcy estate.
An equitable interest in property is seen as an interest a debtor has that might be contingent – such as a cause of action that has not yet been litigated to a final order, or an interest based on status – such as the interest a surviving child has in a parent’s estate, if the estate has not yet been probated.
Section 541 of the US Bankruptcy Code has several subdivisions that identify specific property interests that are included in the bankruptcy estate. In states where there are community property laws (such as Wisconsin), spousal community property is property of the bankruptcy estate. Some post-bankruptcy filing property interests also become property of the bankruptcy estate: inheritances, property settlements and life insurance proceeds to which the debtor becomes entitled to within six months after the case is filed becomes property of the bankruptcy estate.
Section 541 also provides that proceeds, product, offspring, rents or profits of property of the estate also become property of the bankruptcy estate. So the bankruptcy debtor who owns rental real estate should understand that the rental property is property of the bankruptcy estate, but so is the rent to which the bankruptcy debtor is entitled to at the time the case is filed. Or the hobby farmer with 15 head of cattle needs to know that the calves that were gestating at the time the case was filed, and are later born are also become property of the estate.
These are just a few examples. The clear intention of the statute is to bring anything of value in which the bankruptcy debtor has some ownership interest into the bankruptcy estate for administration of estate by the case trustee.
While the definition of property of the estate is very broad, there is one significant restriction – and it has to do with time, not the composition of the property. Property of the estate is only property in which the debtor had an interest at the time the case was filed. There is the notable exception, that I referred to above, the sweeps the right to receive an inheritance, property settlements or life insurance beneficiary payments into the bankruptcy estate, provided that the bankruptcy debtor became entitled to this property within 180 days after the debtor’s bankruptcy case was filed.
And debtors should understand that the bankruptcy trustee, in administering the property of the bankruptcy estate, does not receive more power or have more rights to the property than the debtor had prior to the bankruptcy case filing. The filing of the bankruptcy case only changes the party who holds the interest in the property – from the bankruptcy debtor to the bankruptcy trustee.
This is important for debtors to understand if the debtor is in a position of co-ownership or ownership of a fractional interest in property. Once the case is filed, the bankruptcy estate is created and the bankruptcy trustee will administer the estate. But the bankruptcy trustee administering, say, a one-fourth interest in family-owned hunting property has no more rights or powers than the bankruptcy debtor had in the property prior to the bankruptcy case being filed. Just as the debtor would not have the ability to sell the property without the consent of the co-owners, the trustee has no more power than the debtor had to force a sale of the property.
And it is important for potential bankruptcy filers to understand that retirement accounts that are “qualified plans” under the ERISA law (401(k) accounts and defined benefit pensions are the two most common “qualified plans”) are not property of the bankruptcy estate. So potential bankruptcy clients should know that they will not lose their retirement accounts if they file a bankruptcy case, provided that the accounts are ERISA-qualified.
The bankruptcy estate is also composed of money or property recovered by the bankruptcy trustee pursuant to the trustee’s avoidance powers. The two most common avoidance actions trustees use are recoveries of preferential payments made by debtors to third-party, family-member or business-associate creditors within the preference period (90 days prior to filing for third parties and one year for relatives and business partners).
What about property that is titled in the debtor’s name, but that the debtor did not acquire and does not possess? This situation arises often when parents of young drivers file a bankruptcy case. In many cases, a 16- or 17-year-old may have saved the money to purchase a car, pays for the car’s fueling and maintenance and pays the insurance on the car. The teenager has possession of the car and controls its use. But because the teenager is under 18, and is not a legal adult, the child’s parent or parents end up having the car titled in their name, not the name of the child. In cases like this, the parent’s title ownership is called “bare legal title.” That is, the parent has an interest in the vehicle since the parent’s name is listed on the vehicle’s title card. However, all of the incidents of ownership rest with the child. In cases like this, bankruptcy courts have ruled that the bankruptcy trustee has what the bankruptcy debtor had prior to the case being filed – bare legal title, and no other interest in the property.
So with the exceptions we discussed above, the basic reality of bankruptcy is that any property the bankruptcy debtor owns at the time the case is filed and any property to which the bankruptcy debtor is entitled at the time of filing
composes the property of the bankruptcy estate and is subject to administration by the bankruptcy trustee.
No discussion of the property of the bankruptcy estate and/or the trustee’s ability to ask for the turnover of property of the estate for administration to benefit creditors would be incomplete and wrong if there wasn’t mention made of the fact that for most Chapter 7 Bankruptcy debtors, the property they own, while it very well might be property of the bankruptcy estate, is unlikely to be liquidated by the bankruptcy trustee, since almost all bankruptcy debtors own property protected from estate administration, called exempt property.
Multiple pages can be written about the structure of exemptions in the bankruptcy code and state statutes. For our purposes in this blog, it’s enough to know that non-exempt property – that is, property that can be sold by the bankruptcy trustee, tends to be assets with intrinsic value, (such as large cash accounts or non-homestead real estate interests) that are not necessary for a debtor to retain in order to lead a dignified life. For the vast majority of Filing Chapter 7 Bankruptcy in MN, all of the property the debtor owns – both real property (land) and personal property is exempt.
The concept to understand is that almost all of the property owned by a bankruptcy debtor is property of the bankruptcy estate, and as such is subject to administration by the bankruptcy trustee, but almost all of the property owned by the debtor is exempt from that administration.
As a general rule, when a bankruptcy trustee asks a debtor to turn over property to the bankruptcy estate, the property requested is the non-exempt property of the estate in the possession of the debtor.
While turnover motions filed by the trustee may be focused on non-exempt assets, the trustee’s turnover motion can involve other items. Section 521 of the Bankruptcy Code details the Debtors Duties of a bankruptcy debtor. Included in section 521 are two provisions that can lead, if the debtor fails to cooperate with the trustee, to a turnover motion. The first provision is found in section 521(a)(3). That subsection provides that if there has been a trustee appointed on a case (and in chapter 7 and chapter 13 bankruptcies, there is always a trustee appointed), the debtor has the duty to cooperate with the trustee “as necessary” to allow the trustee to perform the trustee’s duties. And section 521(a)(4) provides that the debtor has the duty to “surrender” to the trustee all property of the estate and “any recorded information, including books, documents, records and papers relating to property of the estate.
Because of these two subsections, bankruptcy debtors are required to supply the bankruptcy trustee with copies of tax returns, business profit and loss and balance sheets and bank records – all documents that have no intrinsic value in themselves, but that can help the trustee determine if there is property of the estate besides that which has been disclosed to the court in the bankruptcy debtor’s schedules, and if so, where that property is located.
This can create burdens for the debtor – particularly the debtor who is not a meticulous record keeper. But if the trustee can show the Bankruptcy Court that the papers are necessary for the trustee to discover the financial information needed to administer a bankruptcy estate, the debtor will, in all likelihood, be required by the court to produce the documents.
If a Chapter 7 Bankruptcy trustee determines that the debtor is in possession of non-exempt assets, the trustee will ask the debtor to voluntarily turn over the asset to the trustee for administration – that is, the sale of the asset to generate cash to pay creditors on a pro-rata basis. Because of the provisions in section 521, the bankruptcy debtor is required to turn over the non-exempt asset. The debtor in this situation has a decision to make at this time: oppose the request on limited grounds, or cooperate.
The debtor can argue that the asset really is exempt, or that the asset in question is not property of the bankruptcy estate. Essentially those are the only two reasons available to a bankruptcy debtor who wants to retain an asset that is being sought for administration by the trustee.
There are ways for bankruptcy debtors to oppose this motion. But if everything breaks down, and the debtor and trustee are locked in their disagreement, the trustee will bring a
Motion to Turnover the Property of the Estate – that is, get a bankruptcy court order requiring the turn over of the property.
At Kain & Scott our experienced MN Bankruptcy Lawyers are available to help you throughout the entire Bankruptcy Process even in the event of a motion for turnover. However, keep in mind that since 1972 the majority of cases that we’ve helped our clients file, they’ve been able to keep all of their property. If you need help or have any questions about Bankruptcy or the Motion For Turnover please give one of our numerous Minnesota locations a call to speak with a lawyer, we’d be happy to help.
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