When you file a bankruptcy case, everything you own becomes your “bankruptcy estate.” In a large majority of Chapter 7 bankruptcy cases everything in the “estate” is “exempt,” meaning that it is protected and you are able to keep it all. Your bankruptcy trustee and your creditors can’t take anything from you that is exempt. (See “Property of the Estate” and “Exemptions” in this website’s Bankruptcy Terms and Definitions.)
A “bankruptcy estate” includes not only everything you own at the time your bankruptcy is filed, but also anything created by or arising out of something you own at the time your case is filed. This is called “after-acquired property of the estate.” For example, if you owed a rental property the trustee (and thus your creditors) would have a right both to the rental property itself and to any rents owed to you on that property, including rents paid after your case was filed (except to the extent that any of this would be exempt). The rental payments would be after-acquired “property of the estate.”. Below is a recent case that addressed an after-acquired asset that was related to an asset of the bankruptcy estate.
Carrie Neidorf owned a home in Phoenix, Arizona that was “underwater”—she owed nearly $100,000 more than it was worth. In 2008 she filed a Chapter 7 “straight bankruptcy” case, and surrendered her home to her lienholders. Three months after filing her case Ms. Neidorf’s debts were discharged (legally written off). Her home was foreclosed several months later by Bank of America.
Nearly six years after filing her bankruptcy case, Ms. Neidorf received a $31,250 check from the bank as part of its settlement with banking regulators related to its allegedly illegal foreclosure activities around the country during the period of time her home was foreclosed. Ms. Neidorf disclosed this payment to the Chapter 7 trustee, Robert MacKenzie, who then filed a motion with the bankruptcy court to force her to turn that money over to him to distribute to her creditors. The bankruptcy court ruled against the trustee, and he appealed to the Bankruptcy Appellate Panel (BAP) of the Ninth Circuit (which covers California). In July 2015, the BAP issued its decision in favor of Ms. Neidorf. (See In re Carrie Neidorf.)
In Ms. Neidorf’s situation, back in 2008 when she filed her case her home had no equity whatsoever, so there was nothing for her to “exempt,” and also nothing for the Chapter 7 trustee to take.
BUT I THOUGHT IN A CHAPTER 7 BANKRUPTCY WHATEVER MONEY I EARN OR OTHERWISE ACQUIRE AFTER FILING THE CASE BELONG TO ME AND NOT MY CREDITORS?
That’s right. As long as that right to something did not exist at the time your case was filed, that future earning or asset is all yours.
To make this distinction clearer, if you filed a Chapter 7 case on January 1, 2015 and received tax refunds totaling $3,000 from the IRS and the California Franchise Tax Board for the 2014 tax year, that $3,000 would be “property of the estate” since it was legally accrued and owed to you as of that January 1 date. That’s true even though you wouldn’t have filed your tax returns until a few weeks or month later and so likely didn’t know the amount of the coming refunds. You had a right to the tax refunds at the time of filing, and so they are “property of the estate.” (See my earlier article, “What Happens to My Tax Refund in a Chapter 7 Bankruptcy?” for more on that.)
Consider in contrast money you earn from your job for work starting immediately after your case is filed. You had no right to the wages or salary from that work at the time your case was filed, since it had not been earned yet, so it is not property of your bankruptcy estate.
The Neidorf case was about something different—an after-acquired asset—the check from the mortgage lender—and whether it was actually created by or arose out of the debtor’s interest in her home before it was foreclosed.
HOW DID THE COURT DECIDE THIS?
First, the Bankruptcy Appellate Panel made an important procedural statement that “[t]he party seeking to include property in the [bankruptcy] estate bears the burden of showing that the item is property of the estate.” The trustee here had to show how the check was sufficiently related to Ms. Neidorf interest in the subsequently foreclosed home.
Second, the court focused on the timing of events related to the check. Ms. Neidorf’s legal right to money from Bank of America arose in April 2011 when the bank entered into a settlement Consent Order with the federal Comptroller of the Currency, and then further in February 2013 when that agreement was amended. As the court said:
In other words, it was the postpetition 2011 Consent Order and 2013 [Amendment to the Consent Order] which created the rights and remedies for the specified class of borrowers.
Seen in this light, that the estate had an interest in Debtor’s Residence is not enough. Nowhere has Trustee shown how the estate obtained an interest in the Foreclosure Payment itself when the qualifying events giving rise to Debtor’s legal rights to the payment all occurred post-petition and were held solely by the borrowers. . . . The payment is thus not an after-acquired interest of the estate.
The court was deciding whether the check was property of the debtor—more like money earned for what happened after the Chapter 7 case was filed—or instead property of the bankruptcy estate—more like proceeds from the home that had been foreclosed years before. Since “the qualifying events giving rise to Debtor’s legal rights to the payment” all happened long after the case was filed, and those rights belonged to Carrie Neidorf personally and not to her long-gone house. So the check belonged to her and not to the estate of her Chapter 7 case.
WHY IS THIS COURT DECISION IMPORTANT?
During and in the aftermath of the Great Recession there were quite a number of mega-million dollar settlements between mortgage lenders and regulators involving the lender’s illegal behavior in the foreclosures they conducted and various other activities. In the settlement referred to in this Neidorf case alone the Bank of America was required to pay more than a billion dollars into the Qualified Settlement Fund for distribution to its former mortgage borrowers. So the direct importance of this Neidorf BAP opinion is that for people who filed Chapter 7 cases during the years between their home foreclosures and when they received settlement funds, they now have some assurance that they can keep those funds, assuming that they had similar timing as did Carrie Neidorf.
But the broader importance of the case is that it makes a distinction applicable to after-acquired assets more broadly. For an asset that arrives later on the scene—such as these settlement funds—to be an asset of the bankruptcy estate it’s not enough that it simply be directly related to something that was clearly an asset of the estate—the home. If “the qualifying events giving rise to Debtor’s legal rights to” the later asset happened after the case was filed, then there’s a good argument that that asset belongs to the debtor and not to the bankruptcy estate.