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What Happens to My Trust During Bankruptcy?


Bankruptcy can enable individuals to get a fresh financial start. If you find yourself buried by debt or struggling to make payments, filing for bankruptcy could enable you to regain economic stability - but what will happen to your trust if you do so? In this blog, that's exactly what we cover.

At Arnold Law Group, APC, we'll work with you to find the best path forward in your bankruptcy case. Contact us online or via phone to schedule a consultation with our team.

Chapter 13 Bankruptcies & Trusts

Fortunately, if you are filing for a Chapter 13 bankruptcy, the property in any trust you possess will probably be safe.

In Chapter 13 bankruptcies, the individual filing for bankruptcy works with the bankruptcy trustee and court to form a repayment plan. Since Chapter 13 bankruptcies are typically filed by individuals with consistent income who can pay off their debts but just need a better structure for doing so, your property should be safe. That being said, failing to keep up with your repayment plan could have negative consequences.

Chapter 7 Bankruptcies & Trusts

If you're filing for a Chapter 7 bankruptcy - meaning you failed to pass a bankruptcy means test - your situation may be a little different.

If you are a trustee - meaning you own the trust - then the property within could be subject to liquidation by creditors to repay your debts, particularly if you have a revocable trust.

However, if you are a beneficiary of a revocable trust, those assets will probably not be seized to repay debts since they still likely belong to the trustee. An exception may occur if the trustee has passed away, but spendthrift provisions may still protect you.

However, if you are the beneficiary of an irrevocable trust, meaning the trustee has signed over the property within to you, that property within the trust may indeed be subject to liquidation by creditors.

Whether creditors will actually liquidate the property within a trust is another matter entirely. Creditors often forego liquidation for eligible property, simply because it doesn't have enough value for them to justify the cost of seizing and attempting to resell it.

A bankruptcy attorney can provide you with a detailed explanation of matters such as spendthrift laws and help you understand whether a trust you own or are a beneficiary of could be liquidated during bankruptcy.

To schedule a consultation with our team and work with one of our bankruptcy attorneys on your case, contact us online.

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