Are inherited assets subject to forfeiture in bankruptcy?
There are many important issues to consider when assessing whether or not to file for Chapter 7 or Chapter 13 personal bankruptcy. The first and most important is obviously the level of debt compared with income, since bankruptcy laws require specific minimum standards in order to be eligible for debt restructuring or debt forgiveness.
In addition to income from work or from investments, it is also important to examine the full scope of assets that one holds before deciding to file for bankruptcy. When making this assessment, people often face confusion about inherited assets, such as a trust.
Whether or not a trust can be accessed by creditors to satisfy a debt depends on a variety of complex factors. The most important factor is whether or not the assets in the trust are accessible to the person filing for bankruptcy at the time of the filing. Having an accessible asset means that the person has control of the contents of the trust at that moment, so, for example, they could withdraw cash from the trust if it holds any, or immediately transfer their interest in a parcel of land. If that is the situation, then a creditor would likely be able to access the trust’s assets for purposes of satisfying a debt, and by the same token it would not be considered exempt from a bankruptcy filing and may be sold or dissolved in order to satisfy some debts.
In addition to the legal status of the trust itself, whether or not part of all of the assets in the trust could be forfeited during bankruptcy also depends on whether the person decides to file under Chapter 7 or Chapter 13. Chapter 7 requires a much broader divestment of assets in order to cover debts compared with Chapter 13, but it also provides for a broader potential discharge of debts once the process is over.
Source: Fox Business, “Is a Trust Untouchable in Bankruptcy?” Justin Harelik, April 9, 2013.
These issues are complex and always depend on the specifics of the case. For more information visit our bankruptcy comparison page.