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Bankruptcy and trust: All you need to know

Bankruptcy and trust: All you need to know

Both bankruptcy and trust are important in the process of becoming debt free. If you want to clear your doubts about bankruptcy and trust, have a look below:

 What is a trust?

A trust is established to take care of assets such as cash or physical property. Keeping your valuables in a trust means the trust owns your properties. In short, there’s a legal relationship between two persons, that is, the owner of the trust and the beneficiary of the trust.

3 parties involved in a trust are:

1 The Settlor

As per, “this person is the original owner of the property in question (lawyers call the property held in a trust the corpus).

2 The Trustee

Again according to, “this person becomes the new owner of the corpus. The trustee is the technical owner of the property but he cannot use the property for his own benefit.” He/she is like a manager who protects the assets for the sake of the beneficiary or some other purposes decided by the settlor.

3 The Beneficiary

As written in, “this is the person for whose benefit the trust is created.” However, the trustee makes decisions regarding the assets and not the beneficiary.

There are 2 types of trusts:

1 Irrevocable trust

As the name suggests, an irrevocable trust protects your assets from your creditors. He/she can’t “satisfy a judgment” against the belongings kept in an irrevocable trust. Without the consent of the beneficiaries, the trust cannot be abolished or changed.

2 Revocable trust

A revocable trust, also known as revocable living trust, living trust or inter vivos trust doesn’t protect your belongings from your creditors. It’s because the items in the trust can be terminated and changed anytime.

Working of trusts in bankruptcy

  • In Chapter 7 or Chapter 13 bankruptcies you can keep some but not all of your assets.
  • The trustee and the beneficiary are the persons who’ve some kind of ownership of the assets in a trust. However, the settlor doesn’t have any interest in the assets.
  • Under a genuine spendthrift clause, the assets in the trust don’t go in the hands of your creditors in bankruptcy.

Caution: Never create a trust just before filing for bankruptcy as it’ll be considered as a deceptive transfer. I would suggest you to have a talk with an attorney and then decide what to do.

 Want to benefit from a trust in bankruptcy?

Have a look below:

 Benefit 1.

Under Section 541(c)(2) of the United States Bankruptcy Code, if you include a spendthrift clause in your trust documents, your assets are prevented from going to the third party like a bankruptcy trustee or your creditors.

 Benefit 2.

Though it won’t help you personally by disclaiming your inheritance, yet it’ll safeguard the grantor’s assets from going in the hands of your creditors. The effect of this action relies on disclaiming before filing for bankruptcy. However, if you do it after filing bankruptcy, the court define it as a fraud.

 Benefit 3.

Under bankruptcy law, you can use the wild card exemption to protect your assets from the bankruptcy estate.

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