In a Chapter 7 bankruptcy, the trustee can administer (sell) non-exempt property of the bankruptcy estate. The bankruptcy estate is defined in Section 541 of the Bankruptcy Code to include all of the debtor's legal or equitable interests in property as of the date the case is filed, wherever located and by whomever held. Therefore, every interest that the debtor has in any property whatsoever on the date of filing is included in his or her bankruptcy estate, subject to very limited exceptions.
Normally, property that is acquired after the bankruptcy filing is not property of the estate and, therefore, not subject to administration by the bankruptcy trustee. However, Section 541(a)(5) lists three categories of property that can become part of the bankruptcy estate after the filing date. Those three categories include any interest in property that the debtor acquires, or becomes entitled to acquire, within 180 days of filing (A) by bequest, devise, or inheritance; (B) as a result of a property settlement agreement with the debtor's spouse, or of an interlocutory or final divorce decree; or (C) as a beneficiary of a life insurance policy or of a death benefit plan.
I represent a debtor who owned real estate in joint tenancy with her mother. The debtor's mother passed away within 180 days of the bankruptcy filing. While the mother was still alive, the debtor's "half" of the house was undoubtedly property of the estate. But, now that the mother has died, is the other "half" of the house property of the estate as well, pursuant to the language in Section 541(a)(5)(A) that talks about "bequest, devise, or inheritance"?
In order to determine the answer, I turned to Black's Law Dictionary. Here are the definitions of the three key terms:
- Bequest - The act of giving property (usu. personal property) by will.
- Devise - The act of giving property (usu. real property) by will.
- Inheritance - Property received from an ancestor under the laws of intestacy.
So, the first two options require that the property, either personal property or real property, pass via a will. That did not happen here. Next, the third option requires that the property pass via the laws of intestacy. In this case, although there was no will, the house did not pass via the laws of intestacy. The house passed via the Illinois Joint Tenancy Act, making it not property of the estate and not subject to the claims of creditors or the bankruptcy trustee. Everybody goes home happy (except the trustee).