FILING a bankruptcy case creates a “bankruptcy estate.” The estate becomes the legal owner of all of the debtor’s property while the bankruptcy is going on.
What does the estate consist of? It consists of all legal or equitable interests of the debtor in property as of the commencement of the case. This includes property owned or held by another person if the debtor has an interest in the property. As a general rule, the creditors of the debtor are paid from the non-exempt property of the estate.
For example, you own a house with $600,000 of equity when you filed for Chapter 7. The “bankruptcy estate” will include your house excluding the $100,000 equity. So the question is, can you keep your house even as you file for Chapter 7 and even if you have $600,000 equity in your house? Yes, you can keep your house by exempting your equity of $600,000.
The trustee is the court-appointed administrator of the “bankruptcy estate” of the debtor. His role is to identify, administer and liquidate the debtor’s non-exempt assets with the intent of maximizing the return to the debtor’s unsecured creditors. If all of the debtor’s assets are exempt, or have legitimate liens on them, the trustee will file a “no asset” report with the court, and there will be no distribution of dividends to unsecured creditors. Most Chapter 7 cases of individual debtors are no asset cases.
The trustee accomplishes his or her objective by selling the debtor’s property if it is free and clear of liens, as long as the property is not exempt, or if it is worth more than any security interest or lien attached to the property and any exemption that the debtor holds in the property. The trustee may recover money or property under the trustee’s “avoiding” powers” (not social distancing). These “avoiding powers” include the power to set aside preferential transfers made within a certain time frame. If the transfer is made to a creditor within 90 days pre-filing, the trustee has a strong case to get the money back into the estate. For example, a week before the debtor filed for Chapter 7, the debtor paid his friend for money that he borrowed from a friend last year in the amount of $100,000. Can the trustee get the $100,000 back into the estate? Of course, he can. This is a classic example of an avoidable preferential transfer. The trustee will file an adversary case against the debtor friend to get the $100,000 back. The lawsuit is against the friend, not the debtor.
There are also transfers to insiders and related parties that are the favorite of trustees. Normally, the trustee can go back four years pre-filing to get these properties back into the estate. For example, the debtor quitclaimed a house with $200,000 of equity to his sister three years before he filed for Chapter 7. The trustee will file an adversary case against the sister to get the house back. Does the sister have a defense? Yes, she does have a defense to defeat the adversary case. If the sister can prove that she paid fair market value for the property at the time that the property was transferred to her, then she can defeat the adversary and she can keep the property. Of course, she will need legal representation to do this because it goes to trial before a Federal Bankruptcy Judge.
In reality, though, it takes a lot of money for the trustee to get a property back because the trustee has to hire a lawyer to litigate the adversary case to avoid the preferential or insider transfer.
For example, the trustee may be able to sell the property for $500,000, but it will take maybe $475,000 of legal expenses to avoid the transfer. The trustee lawyers get paid, the trustee gets paid his fees, and all other professional who helped in the case get paid their fees. All professional fees get paid first from the sale proceeds. Whatever is left is distributed equally to unsecured creditors.
But what if the property is not part of the bankruptcy estate? An asset may be under the name of the debtor but the debtor merely holds the property in trust for someone else. That asset is not part of the bankruptcy estate because the debtor has neither legal nor equitable title to it. For example, the debtor’s parents live abroad and they ask the debtor to buy them a house in Beverly Hills for $3 million. Parents then wire transfer $3 million to the debtor’s account. That $3 million does not belong to the debtor and is not part of the bankruptcy estate. Of course, the trustee will attempt to get the $3 million, but the parents will have to hire legal counsel to defeat the claim of the trustee. Parents will win because the $3 million belongs to the parents, not the debtor.
If you need debt relief, set an appointment to see me. I will analyze your case personally. Wear a facemask and gloves for our appointment. I also wear a facemask and gloves and we will be at least 6 feet apart. I know it’s tough losing your job or having a business with no revenue. Use your credit cards and credit lines to tide yourself through these unusual times. When you need relief from accumulated debt, it’s time to see me.
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Disclaimer: None of the foregoing is considered legal opinion and no attorney-client relationship is created between the reader, any third party and attorney.
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Lawrence Bautista Yang specializes in Bankruptcy, Business, Real Estate and Civil Litigation and has successfully represented more than five thousand clients in California. Please call Angie, Barbara or Jess at (626) 284-1142 for an appointment at 20274 Carrey Road, Walnut, CA 91789 or 1000 S. Fremont Ave., Mailstop 58, Building A-10 South Suite 10042, Alhambra, CA 91803.
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