Proceeds, Rents, or Profits as “Property of the Estate”
Assets acquired after filing under Chapter 7, such as wages, can’t be reached by the trustee. But watch out for proceeds, rents and profits.
After-Acquired Property Is USUALLY Not Property of the Estate
Your filing of a Chapter 7 “straight bankruptcy” case creates a bright red line of timing. What you own at that moment of filing is potentially accessible to the Chapter 7 trustee to pay your creditors. It’s “property of the bankruptcy estate.” What you acquire later is not.
In most consumer Chapter 7 cases the trustee actually does not take and liquidate anything out of the “bankruptcy estate.” That’s because in most such cases everything in the estate is exempt—covered by the available property exemptions.
But it’s still important to know what is included in the bankruptcy estate and what is not. That’s especially true if you don’t realize that something is, and then you don’t have an exemption that protects it. As a result something that you expected to be able to keep could be taken from you.
The purpose of this blog post is to prevent this bad surprise for you when it comes to “proceeds, product, offspring, rents, [and] profits.”
This exception to the bright timing line is pretty simple and even commonsensical. If you own something at the moment of filing, that’s property of the bankruptcy estate. The fruit of that property is also property of the estate.
Here’s how the Bankruptcy Code puts it. The bankruptcy estate includes “[p]roceeds, product, offspring, rents, or profits of or from property of the estate.” Section 541(a)(6).
The practical ways that problems arise include if:
- an asset is exempt but its proceeds, product, etc. is not
- an item of property is not exempt so you intended to surrender it to the trustee but expected to keep some proceeds
- you are eventually surrendering an asset to a creditor, it little or no equity so the trustee is not interested in it, but you expected to keep its proceeds before your surrender to the creditor
The best way so explain these three are by example.
1) Exempt Asset but Proceeds Are Not
Your family dog has a good pedigree and is worth a fair amount, but is exempt. You file Chapter 7 bankruptcy when she is carrying a litter of pups. A month later 5 puppies are born, each healthy and with a fair market value of $1,000. Those puppies are property of the Chapter 7 estate as “offspring” of your dog (who herself is property of the estate).
In your state you may or may not have a “wild-card” or some other exemption that would apply to that $5,000 worth of “offspring” of the bankruptcy estate. If not the trustee could take and sell those puppies and pay the proceeds to your creditors.
2) Non-Exempt Asset’s Proceeds
You own a nice boat which is not protected by any exemption. You don’t want the boat anyway because it costs too much to maintain, so you’ll be surrendering it to the trustee. But for the last several months you’ve been renting it out to a friend for $500 per month, $200 of which covered the moorage fee in your name. You thought you’d get another rental payment or two after filing and before turning the boat over to the trustee.
But any $500 rent payments you receive after the date of filing are property of the Chapter 7 estate. On top of that the after-filing mooring fee would be a debt likely not covered by your bankruptcy case. So besides the trustee taking your renter’s $500 (or $1,000 for two months), you’d still be liable for the mooring fees. It’s a doubly bad situation.
3) Proceeds of No-Equity Property Before Surrender to Creditor
You own a rental home that’s ended up being a bad investment. It’s virtually underwater—worth about what you owe on it, and costing you more than you’re making on it. So you are filing bankruptcy and surrendering the home to its mortgage company. But you have a renter paying $1,250 monthly, and you figure you can keep a couple months of rent before surrendering the home to the mortgage holder. You’re hoping to get even more months because the bankruptcy filing may buy you more time before a foreclosure.
But that rental home is property of the estate, even if it has negligible equity. So those rental payments are property of the estate as well, even though they are arriving after that otherwise bright red line of the date of your filing. You would have to surrender the rent payments to the Chapter 7 trustee, except to the extent there would be an exemption covering any of it.
Why You Need an Experienced Bankruptcy Lawyer
This blog post today is a lesson in why you should not file a bankruptcy without a lawyer. It’s also a lesson in why you shouldn’t file without an experienced one. Bankruptcy law is quite complex. Some of the most basic rules may seem pretty straightforward. But then there are the exceptions. And there are countless twists and turns that may or may not apply to your case. It makes sense to rely on someone who has spent years doing nothing but working those twists and turns.