When we think of abandonment, images of derelict buildings spring to mind. In New York bankruptcy, though, it’s just the process by which a trustee (or debtor in possession) can divest property from the bankruptcy estate, returning it to the debtor. Section 554(a) of the Bankruptcy Code authorizes the trustee to abandon any asset that is “burdensome to the estate or that is of inconsequential value and benefit to the estate.” In short, the trustee determines that the costs of holding on to the property outweigh the potential benefit of selling it, if there’s any benefit to be had at all.
When might this happen? Perhaps a secured creditor’s claim in the debtor’s property exceeds its resale value. Alternatively, the property might require regular maintenance costs, or selling it will incur undesirable tax consequences. The property might even be environmentally contaminated. In these circumstances, the trustee might prefer abandoning the property on behalf of the bankruptcy estate and letting the debtor deal with it.
Trustees can’t abandon property at will. They can only do so after notice and a hearing, which can be filed by either the trustee or a party in interest. In the case of the latter, the court can order the property abandoned. The whole point is to ensure that parties, especially creditors, have a chance to object in case they either dispute the trustee’s determination that the asset is valueless or think abandoning is a bad idea.
Importantly, an asset can only be abandoned if the debtor scheduled it in the first place. If it’s not scheduled, it doesn’t revert when it’s abandoned. The reason is that not all assets are physical objects—they can be personal injury claims, which insurance companies can dismiss by using “judicial estoppel.”
Abandonment also plays a role at the end of a bankruptcy case: It’s the mechanism by which any of the bankruptcy estate’s property that hasn’t been administered is transferred back to the debtor. Trustees will often use this process to abandon property that isn’t necessarily burdensome but is of inconsequential value to the debtor to save the effort of going through a hearing for it. Until the case is closed, however, the property is still part of the estate.
Once it’s abandoned, the original owner or party with an interest in the property can use it as before. Although, any secured creditors can start or resume a foreclosure process over the property. Importantly, from a creditor’s perspective abandoned property isn’t the same as property for which the automatic stay has been lifted. When the stay is lifted, the bankruptcy estate maintains its interest in the property to the extent it isn’t protected by an exemption.
For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced bankruptcy attorney Brooklyn NY Bruce Weiner for a free initial consultation.