Many clients ask me if they should list a particular asset in their bankruptcy petition. They might ask me if it is okay to leave an asset off the petition for bankruptcy.
Most people know that it is a crime to intentionally leave an asset off a bankruptcy. That is reason enough to list everything. But there is another important reason to list all your assets that might not occur to you.
When you file bankruptcy, in theory, all your assets are transferred to the bankruptcy trustee. He or she technically owns all your assets the moment you file bankruptcy. Then after the trustee reviews your case he or she “abandons” those assets that are exempt. or worthless. By “abandon” I mean the trustee transfers ownership of those assets back to you.
The trustee can ask the judge to officially declare that your assets are abandoned. He or she might do that with respect to a particular item of your property that the trustee immediately realizes is exempt or has no value. This allows you to deal with the item of property as the owner. This might happen in the case of your home if it is underwater or clearly exempt.
But most of the property is “abandoned” by an automatic process. Whatever property you listed in your bankruptcy petition that was not “administered” by the trustee is automatically abandoned (returned to you) when the bankruptcy case closes.
But If you didn’t list an item of property in your petition then it is not automatically abandoned when the case closes. The trustee still owns if even if he doesn’t know about it. If the trustee finds out about it he will take it.
This is especially important in the case of a claim against a 3d party you have when you file bankruptcy. Let’s say you were in an auto accident on June 1, 2018. You were injured. You have a claim against the person that injured you and his insurance company. Let’s say you file bankruptcy June 1, 2019 and don’t disclose the claim as an asset in your bankruptcy. A few months later you complete your bankruptcy. You are unable to settle your personal injury case and you file a lawsuit on May 1, 2020, one month before the 2 year statute of limitations expires. Another 6 months go by while you’re preparing to go to trial on your personal injury case. The attorney for the 3d party (or his insurance company) checks the bankruptcy records and sees that you didn’t list the claim in your bankruptcy. The trustee remained the owner of your personal injury claim. Then the attorney for the person that injured you files a motion to dismiss your case because a lawsuit was not filed within 2 years after the accident. You say “But I did file it before 2 years expired. I filed it on May 1, 2020, a month before the statute of limitations expired on June 1, 2020.” The attorney for the person that injury points out to the court that you had no standing to file the suit. It was owned by the bankruptcy trustee. You lose your personal injury case.