When a debtor files for bankruptcy, their assets become something called property of the estate. In this article, we define the term “property of the estate” and explain what is and is not included in it. 

Key Takeaways

• Property of the estate is the property of a debtor who files for bankruptcy that will be liquidated to pay off their debts
• Property of the estate is governed by section 541 of the Bankruptcy Code
• Property of the estate includes all legal or equitable interests of the debtor in property as of the commencement of the bankruptcy case
• There are both state and federal exemptions of property that is not included in the property of the estate
• Property of the estate is managed by the bankruptcy trustee, a neutral third party assigned to protect the interests of the creditors 

What Is Property of the Estate?

When a debtor files for bankruptcy, their property is seized and put into a bankruptcy estate. Anything in the bankruptcy estate is considered to be property of the estate, and it will be sold off and the proceeds used to equally pay back all of the debtor’s creditors. 

Property of the estate is governed by section 541 of the Bankruptcy Code. According to this section, property of the estate includes all legal or equitable interests of the debtor in property as of the commencement of the case.

In practice, property of the estate will include:

• Property in the debtor’s possession
• Property the debtor has recently given away
• Property the debtor hasn’t received yet but is entitled to
• Proceeds from the debtor’s property
• Assets received within 180 days after filing including inheritance and life insurance proceeds
• The debtor’s share of marital property
• Recovered fraudulent transfers
• Preferential creditor payments
• Value increase of property of the estate

That being said, not everything that a debtor owns will be considered property of the estate. There are certain things that are exempt from being included in the estate, with both federal and state exemption lists existing. Among property not usually included in property of the estate is:

• Property that the debtor holds in trust for another party
• Any income derived from the services of the debtor performed after the filing for bankruptcy protection
• Equitable powers that the debtor may exercise for others
• Educational IRA plans
• 529 plans
• Certain ERISA-qualified retirement plans

Significance of Property of the Estate

Once property is put into a bankruptcy estate, the debtor can no longer use it as they see fit. The bankruptcy estate is managed by the bankruptcy trustee who has control over the property of the estate. The trustee is a neutral third party who has a duty to the debtor’s creditors to properly manage property of the estate for the creditors’ benefit.