Can Creditors Get Property Put in Trust Before a Bankruptcy?

By Beverly Bird

The law is full of questions that have both yes and no answers, particularly when it comes to bankruptcy and trusts. Some trusts can protect your assets from creditors, while others cannot. You may lose property in one type of bankruptcy, but not in another. Successfully using a trust to shield assets before you file depends on a lot of factors.

The law is full of questions that have both yes and no answers, particularly when it comes to bankruptcy and trusts. Some trusts can protect your assets from creditors, while others cannot. You may lose property in one type of bankruptcy, but not in another. Successfully using a trust to shield assets before you file depends on a lot of factors.

Chapter 13 vs. Chapter 7

If you file for Chapter 13 bankruptcy, creditors can't get to your property. It doesn't matter whether you retain ownership or place the assets in a trust – they're not in jeopardy because your debts are satisfied through your disposable income each month. You give this money to the bankruptcy trustee, who then distributes it among your creditors. Chapter 7 is a different matter. This is the form of bankruptcy in which the trustee takes control of your property, selling it to raise money to pay off your debts. You're permitted to keep exempt assets, including certain values of equity in your home and automobile, and some personal property. If your assets exceed the amount of exemptions available to you, the trustee liquidates those that are not covered.

Get a free, confidential bankruptcy evaluation. Learn More

Irrevocable vs. Revocable Trusts

Taking bankruptcy out of the equation – you haven't filed yet and maybe you're not sure you're going to if you can otherwise protect your property – assets that you place in a revocable trust are still vulnerable to your creditors. This is because you would typically act as trustee of your revocable trust, and you would also be a beneficiary. These trusts allow you to retain control of your assets, buying and selling them or taking them back into your ownership at will. Therefore, the trust isn't necessarily an impediment to creditors who want to seize the assets in satisfaction of your debts – it's just as though you had retained ownership yourself. If you form an irrevocable trust, however, you step aside and allow someone else to run it for you. This permanently severs the ownership link between you and the assets you fund the trust with, so they're not typically available to your creditors. Your timing can be important, however. In some states, if you transfer property into the trust at a time when you're already insolvent and owe money, the court will reverse or undo the trust to put the assets back in your ownership, giving your creditors access to them.

Fraudulent Transfers

The Bankruptcy Abuse Prevention and Consumer Protection Act allows the trustee to "avoid" transfers of property you make to a revocable trust in the 10 years before you file. This means he can undo them, taking the property back into your bankruptcy estate if he believes you moved them into the trust in an effort to avoid paying your creditors. Your bankruptcy estate is the property available for liquidation to satisfy your debts in Chapter 7.

Disclosure to the Trustee

You're legally obligated to divulge the existence of your trust when you file for bankruptcy protection. If your trust is revocable, you can use your bankruptcy exemptions to protect the property within it, just as you could if you still owned the property outright.

Get a free, confidential bankruptcy evaluation. Learn More
The Different Types of Revocable Living Trusts

References

Related articles

How Long After Discharge Can a Trustee Take Assets?

Debtors often believe that when they receive a bankruptcy discharge, their case is over, but this isn't always true. Your bankruptcy case remains open, and the trustee can reach your property indefinitely until he either abandons the particular asset or files a no-asset report with the court.

Bankruptcy Fraud Penalties

Generally, fraud is dishonesty in some form, which is done with the intent that others rely on it so that you gain an advantage for yourself or cause a disadvantage to someone else. Since bankruptcy is intended to provide relief to the honest debtor and treat creditors as fairly as possible under the circumstances, bankruptcy fraud by any party involved in the process is taken very seriously. There are several penalties that can be applied.

Are Living Trusts Exempt From Lawsuits?

Trusts can provide many advantages for asset protection, as well as easing the transfer of property from one generation to the next. However, not every trust protects assets from creditors or lawsuits. Testamentary trusts, which only become active after your death, can protect assets from your beneficiaries' creditors. However, living trusts, created during your lifetime, only provide protection from lawsuits against you if the trust is irrevocable.

Related articles

What Will Constitute a Fraudulent Conveyance in Chapter 7 Bankruptcy?

The law doesn't allow you to pick and choose which property you’d really rather not give up for liquidation when ...

Can You Transfer Debt Into a Living Trust?

A living trust is an agreement in which you transfer your assets into the ownership of the trust. You can retain ...

How Does a Living Trust Avoid Nursing Home Costs?

It’s a myth that all living trusts avoid nursing home costs. Different kinds of trusts exist and some offer no ...

Do I Have to Give Up Things That I Own Outright When I File Bankruptcy?

Bankruptcy can be an intimidating process because of the uncertainty and complexity involved in turning over your debts ...

Browse by category