Thursday, November 3, 2011

The Two Entity Theory in Bankruptcy

When you file for Chapter 7 Bankruptcy protection, you create a new, separate, and distinct legal entity from yourself. It is called your bankruptcy estate and is comprised of everything you own and everything you owe, on the date that you file a petition. It has a life of its own which lasts for a number of months. The second entity is viewed as you without all of your debt and is called your post-petition estate. In theory, these two entities are distinctly different. The trustee in bankruptcy can get at any non-exempt assets which you own on the date of your filing, but cannot get his or her hands on things that came into your possession on the day after you file bankruptcy. If you had an income tax refund or an inheritance coming to you on the date you filed, these items are part of your bankruptcy estate. But if you win the lottery on the day after you file bankruptcy, in theory, the trustee cannot get at those funds because they are part of your post-petition estate. In all likelihood someone who wins the lottery shortly after filing, would probably want to pay off their debts with the winnings, and would probably make a motion to have the bankruptcy dismissed.  Bankruptcy has long been viewed as a system of people helping other people out of debt. It rarely becomes adversarial. Most creditors back off when you file for bankruptcy, because the automatic stay prevents them from trying to collect the debt or even calling you on the telephone. The clean slate or fresh start are available, you can legally erase the debt. If your expenses exceed your income and you just cannot make ends meet, you may want to create a new, separate and distinct legal entity which will help you get out of debt.

1 comment:

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