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Does a bankruptcy filing affect assets in a will or trust?

Are assets in a trust subject to the jurisdiction of a bankruptcy court? The answer depends on the type of bankruptcy and the type of trust. However, a general rule of thumb is that assets over which an individual has control or a beneficial interest might be fair game. 

Notably, a federal court recently was confronted with this issue. A Chapter 13 debtor wanted to utilize an exemption for her beneficial interest in a living trust. The trust was owned by her non-debtor husband and funded with the couple’s house.

Section 522(b)(3)(B) of the Bankruptcy Code contains an exemption for real estate owned as a tenant by the entirety. Spouses normally own real estate in this manner, which means that the property is jointly owned and neither can sell or transfer their share in the property without the other’s consent.  

In this case, the couple had created a living trust. However, both spouses were named as beneficiaries, and the trust documentation described that beneficial interest as a tenancy by the entirety. Accordingly, the court determined that the exemption still applied.

In contrast to the liquidation of assets that results from a Chapter 7, many debtors can save their home equity in a Chapter 13 filing. A Chapter 13 is usually focused on debt restructuring via a five-year repayment plan. Debtors struggling with a home mortgage might benefit from a Chapter 13 filing because the repayment plan might provide for little or no interest on those mortgage payments. More importantly, a Chapter 13 might stop a foreclosure proceeding, thanks to the automatic stay provided by bankruptcy law.  

Source: BNA, “Ch. 13 Debtor Can Exempt Home Conveyed to Living Trust,” Jan. 20, 2016

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Goldman & Beslow, LLC is a Federal Debt Relief Agency by an Act of Congress. We have proudly assisted consumers seeking relief under the U.S. Bankruptcy Code for over 38 years.

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