Using Motions to Compel Turnover of Bankruptcy Estate Property

When a bankruptcy petition is filed, the debtor’s assets generally become a part of the bankruptcy estate. This means they are protected from creditors and to some extent may be kept by the debtor under recognized federal or state exemptions. However, some assets belonging to the estate may be in the possession of creditors or other third parties. In such situations, the U.S. Bankruptcy Code provides a powerful tool known as a motion to compel turnover.

Under Bankruptcy Code § 542, a trustee or debtor has the right to demand the turnover of any property belonging to the estate that is held by another entity, provided that the property has significant value. The definition of “property of the estate” is broadly construed to encompass all legal or equitable interests of the debtor in property at the time of the bankruptcy filing. This includes property in which the debtor retains redemption rights or residual ownership interests, such as a vehicle that was repossessed prior to the petition filing.

Instances when a motion to compel turnover can be useful include the following:

• In a Chapter 7 case, if the debtor’s business equipment was leased to another entity and not returned upon filing for bankruptcy, the trustee can file a motion to retrieve the equipment for sale during the liquidation process.
• In a Chapter 13 case, a turnover motion can be used to reclaim possession of income-producing assets or personal property necessary for the debtor to fulfill the repayment plan, such as a vehicle essential for the debtor to continue earning an income and making plan payments.
• In a Chapter 11 case, a motion to compel turnover might be necessary to regain control of assets held by others, such as machinery, inventory or receivables, which are essential for ongoing business operations and successful reorganization.

Once a motion to compel turnover is filed, the creditor in possession of estate property may assert defenses such as the need for adequate protection of their security interest. The court might require providing additional security or assurances that the creditor’s interest will not be unduly jeopardized by the turnover. Another defense is that the property itself is of little value to the estate.

If the property in question has already been disposed of, such as a vehicle sold at auction before the bankruptcy filing, it generally ceases to be part of the estate, rendering § 542 inapplicable. In these scenarios, the trustee might explore other legal avenues, such as attempting to recover the proceeds of the sale or challenging the transfer as preferential or fraudulent.

Whether dealing with repossessed property or assets withheld by others, a skilled bankruptcy attorney can effectively utilizing § 542 and take other measures necessary to recover property rightfully belonging to the bankruptcy estate and subject to legal protection.

The Law Offices of Michael Jay Berger in Beverly Hills is one of Southern California’s most experienced bankruptcy law firms, with 12 locations across the region. We represent individuals and companies in need of bankruptcy protection. Call 310-271-6223 or contact us online to schedule a free consultation.