Clients often ask whether they can keep a treasured possession, like a 1968 Camaro, out of their bankruptcy? Technically, no.
What Can I Keep?
When filing bankruptcy, you do not get to pick and choose what is turned over to the bankruptcy Trustee. Everything you own and owe gets turned over. The Trustee then uses your assets to pay off your creditors, to the extent possible. To the extent your assets don’t cover your debts, the debts are wiped out. That’s the legal deal: in exchange for having your debts go away, you give all assets to a bankruptcy Trustee.
In practice, however, the process is not as harsh as it sounds. California gives debtors exemptions, a dollar value of assets they are allowed to keep. The current “wild card” exemption allows debtors to keep $30,825 of any kind of asset, including cold cash. Debtors may additionally keep $5,860 worth of vehicles. And homeowners may keep $300,000-$600,000 of the equity in their primary home, as of January 1, 2021. Most debtors who go through bankruptcy keep everything they own.
But all assets go through the charade in which they are legally transferred to the Trustee’s ownership, and then the exempted assets are legally retransferred to the debtor.
What’s this mechanism? The bankruptcy filing creates an “estate” – a separate legal person – which owns all the debtor’s assets and liabilities. It’s like a corporation, and it’s managed by a bankruptcy Trustee, an attorney or accountant appointed by the Department of Justice. Sometimes the estate has to get a Tax Identification Number from the IRS, file a tax return, and pay taxes. A bankruptcy trustee administers the estate.
What’s in the estate? The answer is in Section 541 of the Bankruptcy Code: “[the estate] is comprised of all the following property, wherever located and by whomever held: . . . all legal or equitable interests of the debtor in property as of the commencement of the case.” No matter where it is, and no matter who has physical possession, if you owned it when you declared bankruptcy, it now belongs to the estate. That includes a beach-front condominium in Baja California; it includes a house that the owner gave to a friend to hold, with the understanding that it would come back to the owner after the bankruptcy blows over; it includes the Arabian stallion being boarded two towns over; it includes a claim for fraud that the debtor didn’t know about when he filed the case, but learned about later.
Debtors get into big problems when they try to keep their assets. Hiding assets from the trustee, or in any way trying to keep them out of the bankruptcy estate, is a federal crime. Don’t be like the baseball player who, after filing bankruptcy, took items from his house (now owned by the Trustee), was caught, and spent time in the clink for it. I, and almost all my colleagues, won’t participate in a federal crime. In general, if there is any doubt, I assume that an asset is part of the bankruptcy estate and disclose it on the bankruptcy petition.
September 6, 2019