To Trust or Not To Trust- Does a Trust have any effect on your bankruptcy?

One item that is often overlooked by persons considering filing bankruptcy is that handy trust that someone said you had to have years ago. Remember, the “My Family” living trust that you created a few years ago? You might have placed a car, a house, or even a bank account in the trust. Then when you look to file bankruptcy, you have forgotten all about it. Often, this is not caught by the bankruptcy attorney until you begin providing things like bank statements and car titles. It is, however, an important matter for discussion before you chose to file bankruptcy, and then before you chose which chapter to file.

Question 10b. of the Statement of Financial Affairs (among the initial bankruptcy documents filed in any bankruptcy case), requires the debtor to respond to the following: “b. List all property transferred by the debtor within 10 years immediately preceding the commencement of this case to a self-settled trust or similar device of which the debtor is a beneficiary.”

Question 14. of the Statement of Financial Affairs requires the debtor to respond to the following: “Property Held for Another Person. List all property owned by another person that the debtor holds or controls.”

On Schedule B, the debtor is required to list the following assets, which may include an interest in a trust:

19. Equitable or future interests, life estates, and rights or powers exercisable for the benefit of the debtor other than those listed in Schedule A – Real Property.

20. Contingent and noncontingent interests in estate of a decedent, death benefit plan, life insurance policy, or trust.

35. Other personal property of any kind not already listed. Itemize.

You get the point. If you have an interest in any type of trust, it has to be reflected in your bankruptcy documents somewhere. A trust may show up as an asset, or you may simply be a beneficiary of a trust that you have no control over whatsoever.

How can you be effected if you have a Trust? There are different types of Trusts. If yours is a self settled Trust, you may have transferred personal assets to the Trust prior to filing your bankruptcy. This could result in your inability to claim those assets as “exempt”, thus losing them to the trustee. It might result in the Trustee suing the Trust to recover the asset if it was transferred without consideration. Many complications are possible. There may be ways to eliminate some of the problems created when you transfer assets into a Trust pre-bankruptcy, but you will need to speak with an attorney to discuss your particular situation.