Are Assets in a Trust Protected in Bankruptcy?

What Sort of Trust & Whose Bankruptcy?


Placing assets into a trust is not always an effective means of protecting those assets from creditors, or, thereby, from the asset liquidation power of Chapter 7 Bankruptcy Trustees.

Trust Assets and Chapter 7 Bankruptcy Liquidation

A Chapter 7 Bankruptcy is a "liquidation" bankruptcy both in that your debt is liquidated, or discharged in full, and in that there is a possibility that your assets may also be liquidated during the bankruptcy process. A Trustee assigned to your Chapter 7 Bankruptcy case by the Bankruptcy Court has the duty of seizing and liquidating personal assets that are valued above the limits of the protective exemptions provided by the Bankruptcy Code statute. While, in most Chapter 7 Bankruptcies, these exemptions are sufficient to cover everything a typical household generally has, some higher earning or higher asset households may include assets that cannot be protected with the available protective exemptions. Thus, in a Chapter 7 Bankruptcy, those assets are subject to seizure and sale for the benefit of the filing person's creditors by the Bankruptcy Trustee. The assets subject to liquidation are the assets that you, the filing Debtor own. Are assets placed into a trust "assets of the bankruptcy estate" which may be liquidated by a Chapter 7 Trustee? The protective quality of a trust will vary greatly depending upon the nature and purpose of the trust, its specific provisions, and state law—and who is filing the bankruptcy in question: you, or one of your children who will inherit the property from the trust?

The Michigan Trust Code and Michigan Bankruptcy

Section 541(c)(2) of the Bankruptcy Code excludes from the "bankruptcy estate" from which the Trustee may liquidate assets property of a trust that is subject to a restriction on transfer on applicable state law. In Michigan, the new Michigan Trust Code made effective on April 1, 2010 specifically allows for so-called "spendthrift trusts," which protect property left via a trust to a beneficiary from the beneficiary's creditors. Thus, if you are the beneficiary a spendthrift trust, in Michigan, your property is safe from the Trustee's liquidation in Chapter 7 Bankruptcy because it is non-transferable to creditors. However, placing property in a trust which is does not very specifically contain an explicit "spendthrift clause" or in preparation for your own bankruptcy will not protect your property in your bankruptcy. The spendthrift trust will protect only the beneficiary's interest in the trust. Short of that, property in a trust must be exempted and protected as any property owned by a filing bankruptcy debtor must, subject to valuation limitations of the available exemptions. The fact that property is "in a trust" will not mean that it is any more protected from liquidation in bankruptcy that property not placed into a trust.

Are Assets in a Trust Protected in Bankruptcy? The Bottom Line

The bottom-line is that, if you plan on or think that you might file for bankruptcy, consult an experienced bankruptcy attorney in Michigan before re-titling or transferring property out of your name. Not only might it not be effective in actually protecting the property from Chapter 7 liquidation, you run the risk of actually or appearing to actually be attempting to hide property from either creditors or the Chapter 7 Trustee, which can run you afoul of Michigan law regarding fraudulent transfer and endanger your discharge in Bankruptcy and even result in the filing of Federal criminal charges. As noted, most property owned by most people who file for Chapter 7 bankruptcy is not in danger of being liquidated. You will not know if any of the property you own is subject to liquidation until after you consult with a bankruptcy attorney. It makes no sense to start moving property around if you do not have all of the information needed. You run the risk of over-complicating what may otherwise be a straightforward Chapter 7 bankruptcy for no good purposes. If your property is subject to liquidation, there are better ways to try and protect it, not least of which is to simply file a Chapter 13 Bankruptcy instead, which is a form of bankruptcy in which no assets are seized and liquidated at all. If you are a Michigan resident and would like to explore your options for a Chapter 7 or Chapter 13 bankruptcy with an experienced Michigan bankruptcy attorney, please contact us at (866) 674-2317 or click the button below to schedule a free, initial consultation.

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If you enjoyed reading "Are Assets in a Trust Protected in Bankruptcy?," please browse our other articles on our main Michigan Bankruptcy Blog.

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