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 debtor are paid from the non-exempt property of the estate.
For example, you own a house with $100,000 of equity when you filed for Chapter 7. The “bankruptcy estate” will include your house including 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 $100,000 equity in your house? Yes, you can keep your house by exempting your equity of $100,000.
If you have another family member who lives with you in the house, and you are less than 65, then you can exempt the entire $100,000 by using CCP 704.730.
What happened was that even if your house and its equity were part of the estate, you were able to keep it out of or exempt it from the estate by invoking 704.730. So, if the Chapter 7 trustee attempts to sell your house, you can successfully block the trustee by claiming that your house is within his jurisdiction because the house is exempt property.
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 the friend last year in the amount of $100,000. Can 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, all other professionals 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 is property that 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 a 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. The 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 parents will have to hire legal counsel to defeat the claim of the trustee. The parents will win because the $3 million belongs to them, not the debtor.
If you need debt relief, set an appointment to see me. I will analyze your case personally. Wear a face mask and gloves for our appointment. I also wear a face mask 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: The foregoing is an expression of opinion and is not meant to be legal advice to any reader. There is no attorney-client relationship established by this article with the reader. If you want to discuss your situation, you have to set an appointment to consult with Attorney Yang. The first general consultation is free.
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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 1000 S. Fremont Ave, Mailstop 58, Building A-1 Suite 1125, Alhambra, CA 91803 or at 20274 Carrey Road, Walnut, CA 91789.
