This entry is part of Nelson Mullins’ Bankruptcy Basics ongoing blog series which aims to address the fundamentals of bankruptcy for practitioners and non-bankruptcy professionals. This entry will explain the concepts of bankruptcy âestateâ and âestate ownershipâ and their importance.
When a debtor files for bankruptcy, the bankruptcy “mass” is immediately constituted. It consists of all of the debtor’s property, both material and immaterial, on the date of filing of the request. The debtor in a Chapters 7 and 13 case can exempt certain assets from entering the estate. These estate exemptions are generally governed by state law, but the bankruptcy code includes a list of exemptions for states that do not have them.
The importance of the estate and the assets of the estate is essential, because the debtor can no longer simply use the assets of the estate as he sees fit. The estate is created for the benefit of the debtor’s creditors and benefits from protections. In the cases of chapters 7 and 13, this protection primarily takes the form of the trustee appointed under chapters 7 or 13, who controls the assets of the estate. As a neutral third party, the trustee is vested with fiduciary duties to the debtor’s creditors to ensure that the assets of the estate are properly managed and maintained for the benefit of those creditors. In chapter 11, the declaring debtor generally assumes the role of âdebtor in possessionâ and has the same powers as the trustee. That said, Chapter 11 cases include additional controls over the exercise of debtor-in-possession authority over real property, including the establishment of a formal committee of unsecured creditors in many cases, as well as oversight of the trustee of the United States.
Since the estate includes all tangible and intangible assets of the debtor, the scope of the estate can be very broad. The lawsuits the debtor was pursuing are the property of the estate, and the trustee can decide whether or not to continue to litigate those cases. Likewise, claims that the debtor has but has not yet filed are also part of the estate. In many cases, these claims include âpreferenceâ actions against creditors who were given preferential payment treatment by the debtor in preparing the bankruptcy case. Beyond statutory claims, all other intangible property rights, including rights to payment, are the property of the estate.
Certain assets are excluded from the estate. Basically, the property that the debtor holds in trust for others does not form part of the estate. This distinction can sometimes be difficult to draw, and disputes can arise as to whether certain funds or property were, in fact, held for the benefit of others and, therefore, did not belong to the estate.
All actions of creditors against the debtor and the assets of the estate are stayed by the automatic stay at the start of the bankruptcy proceedings. This ensures that the estate is maintained and that all assets can be properly accounted for before any determination as to how the estate is going to be administered.
Simply put, the estate can be thought of as all of the assets of the debtor, combined into one pool, so that the trustee and creditors can determine the value of the estate and the various claims against the estate. Although there are certain exemptions and exceptions, the estate is effectively comprehensive.