Bankruptcy: Postpetition Income Part II

Post Petition Income from Sale of BusinessA debtor sold her business about ll months before filing her bankruptcy petition. At the time of the sale, the debtor entered into a non-competition agreement with the purchaser under which the debtor agreed, for a consideration of $150,000 per year, not to compete with the business in a specified area for a period of five years. This type of non-compete is not uncommon. The annual payments were to be made at the end of each of the five years. About a month after the petition, the debtor received the first payment. The question became whether the payment is property of the bankrutpcy estate?

The Bankruptcy Code
The Bankruptcy Code states that a petition for bankruptcy creates a new legal entity separate and apart from the debtor's prepetition estate. The debtor`s property prior to the date of bankruptcy goes into the bankruptcy estate. In due course, all the prepetition property is liquidated and its proceeds distributed to creditors. At the same time as the bankruptcy estate is created, the individual Ch. 7 debtor begins to accumulate a new estate. This new estate consists of earnings and property acquired after the filing as well as property that has been released to the debtor from the estate as exempt or abandoned by the trustee has having no economic value. These postpetition assets of the debtor are the basis of his or her fresh start. Petition creditors cannot reach them because they are stayed from doing so pending the debtor’s discharge, and are thereafter permanently enjoined from collecting prepetition debts.

So What About the Sale of the Business?
Although the earnings from the non-competition agreement accrue postpetition, the agreement creating the right to the earnings was entered into prepetition. The proceeds from the non-competition agreement were derived from the debtor’s prepetition activities, and are likely proceeds
of the bankruptcy estate property.
For more bankruptcy information read: Bankruptcy: Postpetition Income Part I, Bankruptcy: Automatic Stay, and What is Bankruptcy, Bankruptcy: Fresh Start, Bankruptcy: Student Loans, Bankruptcy: Means Test, Bankruptcy: Income Eligibility, Bankruptcy: New Asset Evaluation