When is a trust exempt from bankruptcy?

When someone in Tennessee files for bankruptcy the bankruptcy court assigns a trustee to the case. The job of a trustee varies depending on whether a person files for Chapter 7 or Chapter 13 Bankruptcy. In a Chapter 7 Bankruptcy, the trustee identifies assets owned by the filer that can be liquidated and used to repay creditors. In a Chapter 13 Bankruptcy, the trustee receives payments based on the settlement and distributes the funds to creditors.

In both Chapter 7 and Chapter 13 Bankruptcy there is certain property protected from the bankruptcy process, these are referred to as bankruptcy exemptions. Individuals who file for bankruptcy must generally choose between state exemptions and federal exemptions. The most common bankruptcy exemptions include the homestead exemption, which protects the equity in a person’s primary residence, car exemptions and retirement savings exemption.

While creditors generally have access to non-exempt property in bankruptcy, the filer must possess control over the property. For example, while an individual has control over their house and car, they may not have control over a trust. This, however, depends on the type of trust. In the case of a revocable trust, the assets are actually controlled by the grantor of the trust, rather than the beneficiary. This can make it impossible for creditors to access.

Another common type of trust is an irrevocable trust. Unlike a revocable trust, the grantor of an irrevocable trust relinquishes their control over the assets in the trust. In such cases, where the beneficiary, or filer, actually has control over the assets available to them, it is possible for creditors to access the contents of the trust for the purpose of repaying debt. It is vital that individuals considering bankruptcy know the terms of their trust before filing.

Source: Fox Business, “Is a Trust Untouchable in Bankruptcy?” Justin Harelik, April 09, 2013