After an individual files for bankruptcy, the court will assign a trustee to the case. The job of a trustee is to make payments to creditors with liquidated assets in a Chapter 7 bankruptcy or make payments to creditors as arranged through a chapter 13 settlement agreement.
In both Chapter 7 and 13 bankruptcies, certain property is protected from the process known as bankruptcy exemptions. Typically these include exemptions for a home, automobiles and retirement accounts.
When it comes to trusts, it is a matter of whether a debtor has control over the assets in a trust. In a previous blog we discussed how revocable trusts are not considered assets under the control of a beneficiary, so are therefore not part of the debtor’s estate for bankruptcy purposes. However, irrevocable trusts can be a different story.
Because an irrevocable trust can’t be modified or terminated without the permission of the beneficiary, the grantor effectively removes all of his or her rights of ownership to the assets and the trust, placing the control of the assets in the beneficiary’s hands. With this in mind, the assets are definitely at risk if you file a personal Chapter 7 bankruptcy.
It may be that there are exemptions that will provide a way for you to protect the trust. A “spendthrift” provision may limit creditor claims to trust assets even when the trust is irrevocable or the grantor has died. However, if the funds in the trust are under your control, it is likely the trustee will consider those as non-exempt assets.
If you are considering bankruptcy, it is important to gain an understanding of the process, including what assets are exempt and what debts you will be able to eliminate to see if bankruptcy will be an effective strategy for you. Contact the Peoria, Illinois Law Offices of Charles E. Covey for answers to your questions regarding Chapter 7 or 13 bankruptcy protection.
