Is all of the bankrupt's property included in the bankruptcy estate?

Bankruptcy proceedings are a complex and multi-stage process, the main purpose of which is to satisfy creditors from the debtor's assets in the event of his insolvency. During this procedure, the debtor's assets become the so-called bankruptcy estate, which is managed by a trustee and serves to cover liabilities. However, this does not mean that all assets of the debtor automatically enter the bankruptcy estate. Polish law provides for a number of cases in which certain assets are excluded from the bankruptcy estate by operation of law. In this article, we will discuss these exclusions in detail, indicating their legal basis, purpose and practical significance for the debtor and creditors.

Contents:

What is a bankruptcy estate?

The bankruptcy estate is all assets belonging to the debtor on the day of the declaration of bankruptcy, although it is worth noting the differences between consumer bankruptcy and entrepreneurial bankruptcy, as well as those assets that the debtor acquires during bankruptcy proceedings. The bankruptcy estate includes movable assets, real estate, property rights, and other assets of the debtor that can be used to repay creditors.

However, not all of the debtor's assets can be included in the bankruptcy estate. Polish law provides for certain restrictions that are intended to protect the interests of the debtor and third parties. These exclusions are based on legal provisions and apply automatically, without the need to file additional applications.

Legal basis for excluding assets from the bankruptcy estate

The exclusion of assets from the bankruptcy estate has been regulated in Act of 28 February 2003 – Bankruptcy Law. The key here is to use:

• Article 63 of the Bankruptcy Law, which specifies the exclusions of assets by operation of law, as well as related court decisions,
• Other special provisions contained in the civil and family codes and in special acts that relate to the protection of the personal rights of the debtor or other persons.

These provisions aim to ensure a balance between the interests of creditors and the protection of minimum standards of dignity and functioning of the debtor.

Exclusions of assets from the bankruptcy estate by operation of law

Exclusions by operation of law mean that certain assets of the debtor do not automatically enter the bankruptcy estate and cannot be used to satisfy creditors. These are most often assets related to securing the basic life needs of the debtor, protecting the family, and those that have a special legal nature.

1. Personal items and basic household equipment

According to the regulations, the bankruptcy estate cannot include items that are necessary to meet the basic living needs of the debtor and his family. These include:

• clothes, shoes, underwear,
• household appliances that are necessary for everyday functioning (e.g. refrigerator, washing machine, basic furniture),
• items used by the debtor for health reasons (e.g. prostheses, wheelchairs).

This exclusion is intended to ensure minimum standards of existence for the debtor and protect his dignity.

2. Cash and social benefits

The bankruptcy estate does not include certain funds and benefits that have a special purpose and nature, including:

• Maintenance benefits – received by the debtor,
• Family benefits, care and other social benefits,
• Social security benefits (e.g. pensions, retirement benefits), to the extent necessary to support the debtor and his family,
• Salary for work, to the extent that it is regulated by the provisions of the Labor Code.

This limitation results from the fact that these benefits are intended to ensure a minimum subsistence level, and their inclusion in the bankruptcy estate would deprive the debtor of the ability to function normally.

3. Items not subject to seizure in execution

Bankruptcy law also refers to the provisions of the Code of Civil Procedure (CPC), in particular Article 829 et seq., which define the list of items excluded from enforcement. According to Article 829 of the CPC, the bankruptcy estate does not include, among others:

• items necessary for the debtor to perform gainful employment (e.g. tools, computer equipment), excluding means of transport,
• food supplies for a month,
• heating fuel for 1 month,
• farm animals and the feed supplies necessary for their maintenance (in the event that the debtor is a farmer running an agricultural holding).

These exclusions are intended to enable the debtor to take up gainful employment and maintain minimum living conditions.

4. Non-property and personal rights

The bankruptcy estate also does not include non-property rights such as:

• copyrights of a personal nature,
• rights to name or image,
• rights arising from family relationships (e.g. parental authority),
• the right of use of real estate.

These exclusions result from the fact that these rights are closely linked to the person of the debtor and cannot be the subject of economic transactions.

5. Items excluded under special regulations, e.g. property intended for scientific activities (Article 831 of the Code of Civil Procedure).

The law also provides that certain assets may be excluded from the bankruptcy estate under special provisions. Examples include:

• property used for scientific or artistic activities,
• items of sentimental value (in certain cases).

Procedure for excluding assets from the bankruptcy estate

Although exclusions are automatic by operation of law, in practice it may happen that excluded assets are mistakenly included in the bankruptcy estate by the trustee. In such a case, the debtor or other interested parties may file a motion with the court to exclude the asset from the bankruptcy estate.

Steps to follow:

1. Submitting an application to the bankruptcy court with justification and evidence confirming the exclusion,
2. The case is reviewed by the court,
3. Issuance of a decision by the court which is binding on the trustee.

In the case of determining the income of the debtor, which is part of the bankruptcy estate, it is worth being aware of the fact that the legislator has provided for the possibility of establishing a different amount of income exempt from enforcement than that resulting from the general rules, taking into account the specific needs of the bankrupt and persons dependent on him, including their health, housing needs and the possibility of satisfying them. The application of the bankrupt or the trustee in this respect is considered by the Judge-Commissioner.

The importance of exclusions for the debtor and creditors

Exclusions of assets from the bankruptcy estate are of key importance to both the debtor and the creditors. From the debtor's perspective, these exclusions allow for maintaining a minimum standard of living and protecting basic existential needs. In turn, for creditors, exclusions may limit the possibility of fully satisfying their claims, which often causes controversy during bankruptcy proceedings.

Possibility of using the prepared liquidation

Prepared liquidation (pre-pack) is a procedure provided for in the Bankruptcy Law, which allows for the sale of the debtor's assets before the formal declaration of bankruptcy. Its purpose is to maximize the value of assets and quickly satisfy creditors by limiting the costs of the proceedings.

Legal basis of pre-pack The legal basis for the prepared liquidation is Article 56a and subsequent of the Bankruptcy Law. This mechanism consists of prior agreement by the debtor or creditor on the terms of sale of specific assets to a specific buyer. The condition for the effective use of the pre-pack is the presentation to the court of a detailed application together with an expert valuation of the assets.

Advantages of a prepared liquidation

1. Shortening of bankruptcy proceedings – the debtor’s assets are sold almost immediately after bankruptcy is declared.
2. Maximizing asset value – pre-pack sale often allows for better financial terms than classic liquidation.
3. Minimizing costs – reduction of expenses related to liquidation proceedings.
4. Preserving jobs – in the case of sale of the enterprise as a whole, there is a greater chance of maintaining employment.

Practical application Pre-pack can be particularly beneficial for debtors with valuable assets, but its effectiveness depends on cooperation with creditors and a reliable valuation by an expert., which can be sold in an orderly manner, e.g. real estate, enterprises or organized parts of an enterprise. However, it requires close cooperation with creditors and a professional valuation of assets.

Exclusion of real estate from the bankruptcy estate

Although, as a rule, all real estate belonging to the debtor is included to the bankruptcy estate, there are certain exceptions provided for by law that allow for their exclusion.

Grounds for exclusion of real estate

1. Real estate owned by a third party – if the property formally belongs to a third party, and not to the bankrupt, it cannot be included in the bankruptcy estate. In such a situation, the owner may file an application to exclude the property based on Article 70 of the Bankruptcy Law. It should be emphasized, however, that this institution does not apply to assets that were transferred by the bankrupt to the creditor in order to secure a claim.
2. Real estate subject to limited property rights – in certain cases, when the real estate is encumbered, for example, with the right of perpetual usufruct or a mortgage, there may be restrictions on its liquidation.
3. Debtor's apartment in consumer bankruptcy – pursuant to Article 342a of the Bankruptcy Law, if the sale of the real estate in which the debtor resides is unavoidable, the court may decide to grant the bankrupt the funds to rent another premises for a period of up to two years.
4. Properties that cannot be sold – in accordance with Article 315 of the Bankruptcy Law, certain assets may be excluded from the bankruptcy estate if they cannot be disposed of in accordance with the provisions of the Act and their continued presence in the bankruptcy estate would be detrimental to the creditors due to the burden of the related costs on the bankruptcy estate.

Property exclusion procedure An application for the exclusion of real estate may be submitted by:

• debtor,
• a third party who claims rights to the property,
• creditor if he believes that the property should not be included in the bankruptcy estate.

The Judge-Commissioner examines the validity of the application and issues a decision that is binding on the trustee. In the event of a dispute, it is possible to file a complaint or to file a lawsuit with the Bankruptcy Court to demand the exclusion of the property from the bankruptcy estate.

Importance of Real Estate Exclusion The exclusion of real estate from the bankruptcy estate is of significant importance to both the debtor and their creditors. The debtor may retain an asset that may be of key importance to their continued existence or business. In turn, creditors may try to demonstrate that the real estate should be liquidated, which often leads to court disputes. It is worth noting, however, that after the date of bankruptcy, creditors may initiate enforcement against assets that are not part of the bankruptcy estate.

Summary

Exclusions of assets from the bankruptcy estate by operation of law are an important element of protection for the debtor and his family in a difficult financial situation. Thanks to them, bankruptcy proceedings do not deprive the debtor of basic means of living or the possibility of conducting commercial activity. Although the regulations on exclusions are relatively clear, in practice disputes may arise regarding their interpretation. Therefore, it is worth consulting a bankruptcy lawyer in such cases. a lawyer specializing in bankruptcy law.

Daniel Anisimowicz

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