How You Should and Should Not Handle Bankruptcy Estate Assets
When a debtor files Chapter 7 bankruptcy , a bankruptcy estate is created. The bankruptcy estate is made up of all the debtor's assets, even those assets which may be later declared exempt. The bankruptcy debtor is not allowed to liquidate any assets in the bankruptcy estate and doing so could end in a denial of their bankruptcy discharge. Even if the debtor is not caught in the act of liquidating bankruptcy estate assets during the life of their case, the bankruptcy trustee can revoke their discharge when they find out, even years after the case is closed.
Below are a few of examples of how debtors should and should not handle bankruptcy estate assets:
Income Tax Refund
If you receive an income tax refund during your bankruptcy, it's best to assume it is a part of the bankruptcy estate and refrain from spending it. Even if you want to declare part (or all) of it exempt, you will need to inform the bankruptcy trustee of its existence first. Unfortunately, if the tax refund is partially exempt, you can expect a challenged from the trustee. Allow your bankruptcy attorney to handle the issue before treating the tax refund as exempt.
An Inheritance After Bankruptcy
If you receive an inheritance right after your bankruptcy discharge, the bankruptcy trustee may attempt to seize part or all of it. Do not make the mistake of spending an inheritance without discussing it with your bankruptcy attorney and informing the bankruptcy trustee that you received it. Even if the bankruptcy trustee does not respond quickly, you must refrain from spending the inheritance or you could face a revocation of your bankruptcy discharge.
Any Asset or Cash The Bankruptcy Trustee Has Claimed But Not Seized
There was a case a few years back where a debtor spent an annuity payout despite the fact that the bankruptcy trustee said he would have it redirected to the court. When the process of redirecting payments to the bankruptcy estate took 3 years, the debtor spent the checks he received anyway. This caused the trustee to revoke his bankruptcy discharge. Even if you are receiving cash deposited directly into your bank account after a bankruptcy trustee has failed to redirect it, resist spending it.