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What happens to a trust in bankruptcy?

Arizona residents struggling with their finances may be hesitant to file for bankruptcy because they are afraid they will lose everything. They may not be aware that there is a long list of bankruptcy exemptions available to them, so they can generally regain control of their finances without losing control of assets that they have an emotional attachment to, such as a house, car and household possessions.

One question that many Arizona residents may have is whether or not trusts are exempt in bankruptcy proceedings.

After a debtor files for Chapter 7 bankruptcy, a trustee is usually assigned to the proceedings. It is the trustee's responsibility to determine which of the non-exempt assets the debtor has control over and can be utilized to repay the filer's debt. So, when it comes to trusts, the determining factor is control - who has control over the trust.

To determine control of the asset, it is important to figure out if the trust is revocable or irrevocable. In a revocable trust, the beneficiaries do not have control over the assets until the creator of the trust passes away, whereas in an irrevocable trust the beneficiaries have a legal right to a portion of the assets immediately.

Some trusts are generally exempt from bankruptcy, under what's called a spendthrift provision - these provisions limit claims on the trust in some circumstances. It is important to understand the types of trusts and the relationship between the creator of the trust and the beneficiaries before filing for bankruptcy, so filers are aware of how the bankruptcy will affect their assets.

Having all the information available before filing ensures filers can make the decision that is right for them. Arizona residents should consider every option that is available to them to ease their financial burden, including filing for Chapter 7 or 13 bankruptcy.

Source: Fox News, "Is a trust untouchable in bankruptcy?" Justin Harelik, April 9, 2013