Trust Funds and Bankruptcy Cases

In bankruptcy cases, trust funds are sometimes used as a way of protecting important assets. During the bankruptcy process, creditors have a right to any assets the debtor owns that are not protected by bankruptcy exemptions. The bankruptcy court can seize these assets, sell them and then divide the funds among the creditors named in the bankruptcy case. Some people try to protect their assets by creating a trust to protect them.

How a Trust Works

A trust is a legal organization of assets. Assets, including money and physical property can be placed into the trust. This simply means that the ownership of the property is no longer the individual's but the trust's. Another person or a group of people may be the legal owners of the trust. The most common way to use a trust is to transfer property ownership into the trust to pass down to children or grandchildren in an estate plan. However, some try to use it to protect their assets in bankruptcy cases.

How Does this Happen?

It is not recommended that you follow this procedure for protecting your assets. In some cases, it can be seen as an attempt to defraud the bankruptcy courts. If this is the case, your bankruptcy case may be tossed out of court and you may face fraud charges.

Do Not Attempt to Hide Assets

The problem with this process is that some people move assets specifically to hide them from the bankruptcy court:

The person creates a trust using another person's name or a group of people.
The person transfers his or her private or business assets into the trust.
Creditors are unable to access the funds directly, but may still pursue the liquidation of the trust if it is deemed fraudulent.
Since the trust assets still earn interest while in the trust, some people try to pull that interest out of the trust to use as income. This creates a scenario in which creditors have access to the trust and that income.

Trusts are meant to protect assets. However, they are not designed to protect assets that should be liquidated through the bankruptcy process.

Contact an Attorney

Before you create a trust in bankruptcy cases, contact an attorney. The only way to be able to do this, without any negative implications, is with a financial planner or estate planning attorney to help you through the process. In most situations, this action is not allowable in bankruptcy, but your attorney can provide more information to you in that regard.

Think Bankruptcy Might Be for You?