Individuals in financial trouble can file Chapter 7 bankruptcy in order to wipe their debt slate clean. It provides a fresh financial start. Filing for Chapter 7 means surrendering control of your assets. Assets are managed by the bankruptcy trustee assigned to your case and may be liquidated or sold in order to provide payment to your creditors. In many cases, an irrevocable trust with a minor beneficiary would be protected from creditors during the Chapter 7 bankruptcy process, but it would depend on the timing; both when the trust was created and the reasons for creating the trust. Before you can understand the answer to the question, “How does a Chapter 7 affect an irrevocable trust to a minor?” You have to know more about the trust itself.
The intention of the trust is to shelter assets on behalf of the designated beneficiaries. If you have an irrevocable trust set up for your minor child, the trust is under the control of a selected trustee. You are not considered as having any ownership or control of the trust’s assets. You can’t change the terms or revoke the trust (except under extremely limited circumstances). Because of this, an irrevocable trust that you have set up for your minor child usually remains protected during your bankruptcy process. The trust’s assets don’t belong to you so there’s nothing for your creditors to take.
It’s important to note that under the Uniform Fraudulent Transfer Act, transferring property to someone, such as a minor child or other relative, with the intention of defrauding a creditor, the creditor then has the right to sue in order to recover the property. This could mean another court case in addition to your bankruptcy case even if the bankruptcy trustee did not make a claim on the irrevocable trust’s assets. Creditors would also have the right in this particular situation to sue the “relative” that was benefitting from the transfer or the trust that holds the property. If the creditor wins the suit, the court can order that trust assets be seized.
If you need further information regarding the vulnerability of funds or property in an irrevocable trust, contact your southern California bankruptcy experts at Westgate Law.