What is the bankruptcy estate, and how do bankruptcy exemptions work?

What is the bankruptcy estate, and how do bankruptcy exemptions work?

I talk a lot about filing bankruptcy, but what is it, exactly, that happens when we file your bankruptcy petition in Utah?

When your Utah bankruptcy attorney files your bankruptcy petition, a fictional “bankruptcy estate” is created.  This estate includes everything you own that is not covered by the exemptions applied by your bankruptcy lawyer.

One of my jobs is to make sure my clients don’t lose any of their property when they file bankruptcy. In most cases, everything you own will be covered by an exemption, although in some cases for people who have valuable assets such as real estate and vehicles, all of their assets may not be exempt. (Although these clients tend to be filing Chapter 13 bankruptcy petitions, in which case, their assets are protected in other ways.)

To understand exactly how the bankruptcy estate works, you have to imagine that you no longer own anything other than your exempt assets.  Instead, the court-appointed bankruptcy trustee steps in as a sort of referee, and manages your assets for you.  The trustee allows you to keep the assets that have been deemed by law as necessary to you (i.e. they are “exempt” from the bankruptcy estate because the debtor needs them).  These assets include necessities such as clothing, food, transportation, shelter, and family heirlooms.   Each state has different laws about what property can be exempt, and unfortunately, Utah’s laws are very stringent.  For example, in Utah, a debtor can claim as exempt only $30,000 in ‘homestead’ real estate while many other states allow more than $100,000 in real property exemptions!  Likewise, Utah allows only a $3,000 dollar per debtor exemption for cars, while many other states allow up to twice this much!  You shouldn’t worry too much about this though.  Even though Utah is stingy with bankruptcy exemptions, in practicality it is rare for a debtor to lose any of their assets.  Especially in a Chapter 7 bankruptcy.

Any assets that are not covered by an exemption will then become part of your bankruptcy estate.  The trustee’s job is to manage these assets for the mutual benefit of your creditors.  In other words, it is the trustee’s job to sell the assets and distribute the proceeds (if there are any) to your creditors.  After the trustee does that, your debts will be discharged – and you will no longer be responsible for paying them.  You can then move on with a fresh start and no financial burdens!

I hinted at this above, but under Chapter 13 bankruptcy, there is no liquidation of your assets. If you are having trouble keeping your head above water, but you have regular income and your home equity exceeds the $30,000 exemption limits, or your vehicles exceed the $3,000 exemption limit, take heart! You may be able to reorganize your debt under Chapter 13 and keep these important assets.


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