When Your Property May Not Actually Be Your Property
When thinking of ways to keep most or all of your property in a bankruptcy, most people think of exemptions. Trying to maximize exemptions is an effective tool to protect most, if not all, of everything you own being taken by the bankruptcy trustee.
But there is another way of protecting property: Arguing that it isn’t yours to begin with.
The Bankruptcy Estate
To understand this strategy, you need to understand what the bankruptcy estate is. Once you file for bankruptcy, everything you own immediately becomes property of the bankruptcy estate. In practice, it’s still yours–nobody walks in and takes your stuff. But legally, your property is “transferred” to the bankruptcy court.
Realistically, because most people will be able to exempt most of their property, or because the trustee won’t want some of your property, all or most of your property will revert back to you. But in the event that some of the bankruptcy estate cannot be protected by exemptions, they could be taken by the court.
What is Yours?
But the bankruptcy court can only take what is actually yours to begin with.
Imagine, for example, someone who is living in a second or investment home (which is not exempt the way a homestead would be), which is titled in his name. However, there is a divorce agreement that says that when sold, the ex wife will get half of the home. That means that the bankruptcy court can never take the full value of the home, because the ex spouse has an interest in it.
The same may hold true for businesses. If someone’s business were to liquidate or wrap up, how much would that person be entitled to? Are there other managers, shareholders or owners, who would get some of the proceeds? If so, the bankruptcy court can only take the debtor’s interest in the business, and that may not be 100% of the business.
The opposite problem can happen as well: People may have an interest in property they don’t realize they had.
Simple things like gift cards may have value, as may unpublished works like books or articles to be published. People may have account balances sitting in PayPal. Most domain names don’t have value, but in certain cases they can. If the filer owns such a domain, the bankruptcy attorney must know about this.
Security deposits are technically property of the debtor, even if he or she doesn’t actually have them. If there is a claim or potential claim on the deposit, the debtor’s interest in the deposit may be reduced.
Someone may be a member of a class, in a class action lawsuit. If that person has a claim, that is an interest, even if the actual lawsuit has not been filed. The question then becomes what is the estimated, potential value of the claim, which is the maximum that could be taken by a trustee.