Asian Journal- The Filipino-American Community Newspaper

QUESTION: The commencement of a bankruptcy case automatically creates a bankruptcy estate. Accordingly, at the time the petition is filed, whether voluntary or involuntary, single or joint, a bankruptcy estate is formed of the debtor’s property, which then becomes subject to administration by a trustee or the debtor-in-possession for the benefit of the debtor’s creditors. The bankruptcy estate includes the debtor’s legal and equitable interests in property owned by the debtor at the time of filing, as well as the proceeds, profits, or rents from such property, certain property to which the debtor becomes entitled within six months of the petition date, and any property interest acquired by the estate after the petition date. For obvious reasons, the timing of the filing of the petition and the timing of the debtor’s receipt of property or income is critical to determining whether property belongs to the estate. Many cases have held that certain types of income or rights to payment that were earned prepetition became property of the estate, notwithstanding the fact that the debtor did not receive the funds until after the filing of the petition.

Question: What exactly does the debtor own at the time of filing in order to determine what must be placed in the estate?

Answer: Section 541(a) provides that all equitable or legal interests of the debtor in property are included within the estate. Section 541(a) is interpreted broadly to include the debtor’s interest in all types of property, including: tangible property, such as real property and vehicles; intangible property rights, such as tax attributes, intellectual property rights, unexpired leases, contract rights, insurance policies, partnership interests, causes of action, and licenses; equitable interests, such as a state law right of redemption in property and a possessory interest in property.

Answer: The estate is entitled to certain property that the debtor acquires, or to which the debtor becomes entitled, within the six months following the petition date, so long as the property would have been included in the estate had the debtor held such interest on the date of filing. The relevant time for determining whether the debtor acquired or became entitled to the property interest within 180 days of the petition date is the date of filing of the original petition rather than the date of subsequent conversion to another chapter. This property falls into three categories.

The first is property acquired by the debtor through bequest, devise, or inheritance. The property must actually be acquired by the debtor by one of these enumerated methods.

The second is property acquired as a result of a property settlement agreement with the debtor’s spouse, or as the result of an interlocutory or final decree of divorce. It should be noted that payments awarded as spousal support or maintenance payments do not become property of the estate under this subsection.

The third category includes property received by the debtor as a beneficiary of a life insurance policy or a death benefit plan. If the debtor is the designated beneficiary at the time of the death of the insured, the debtor will be considered to have become entitled to receive the life insurance proceeds, notwithstanding the fact that the debtor’s interest is contested. It should also be noted that, in the case of joint debtors, if one spouse dies during the 180-day period following the filing of the petition, and the other spouse is the beneficiary of the deceased spouse’s life insurance policy, the proceeds will enter the estate of the beneficiary spouse only. Unless the two debtor estates are substantively consolidated, the life insurance proceeds will be available for payment of only the beneficiary spouse’s creditors.

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Attorney Brian D. Lerner has his main office in Long Beach, California. You can call 866-495-0554 for information on how to obtain a free consultation. He has been licensed since 1992 and practices Bankruptcy and Immigration Law.

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( Published October 24, 2009 in Asian Journal Los Angeles p. C5 )