Bankruptcy can provide a fresh financial start for a consumer who is overwhelmed with personal debt. Chapter 7 bankruptcy allows a person to stop creditor harassment and eliminate most debt. For some Arizona consumers with assets, filing for Chapter 7 might pose a problem because of the asset liquidation requirement associated with this type of bankruptcy.

When a person files a Chapter 7, the bankruptcy court appoints a trustee to oversee the case. The role of the trustee is to find assets that are controlled by the consumer and sell them to satisfy some of the person’s debt. Some real and personal property items are exempt from asset liquidation under Arizona state law. Examples of protected assets might be the consumer’s home, personal car, clothing and a limited amount of money.

The extent of control a consumer has over an asset might be a difficult to determine with certain assets. Property held in a trust is an example. A trustee who is appointed when the trust is created usually controls trust assets but not always.

An irrevocable trust is one in which the settlor, or creator of the trust, gives up all rights of control over the assets to the trustee when the trust is created. The situation is quite different in a revocable trust where the settlor controls the assets until control is transferred to the trustee when the settlor dies.

A person who is contemplating filing for Chapter 7 might benefit from speaking to a bankruptcy attorney if there are assets that have been transferred to a trust. The question of who has control over trust assets might be more complicated than simply determining if a trust is revocable or irrevocable. Rights of beneficiaries to trust assets and other factors affecting how the bankruptcy court will treat a trust could be discussed with an attorney before filing Chapter 7.


Source: Fox Business, “Is a trust untouchable in Bankruptcy,” Justin Harelik, April 9, 2013