Friday, November 5, 2010

I am the Trustee of a Trust. Can the Bankruptcy Trustee Take the Trust Assets?

If a debtor is a trustee of a trust, 11 U.S.C. § 541(a) provides that the bankruptcy estate includes the trustee’s powers granted under the trust instrument. The bankruptcy trustee has the power to step into the trustee’s shoes and exercise the trustee’s powers with respect to the trust, but this does not mean that the assets of the trust automatically become assets of the bankruptcy estate; rather, the assets in the trust remain separate from the bankruptcy estate.

However, depending on the terms of the trust, the trustee may have the power to revoke or terminate a trust, the power to amend the trust, or the power to direct distributions of funds of the trust. Therefore, these powers could allow the bankruptcy trustee (acting in place of the original trustee) to obtain access to the trust assets, particularly if the trust assets could be made available to the debtor. Additionally, when the trustee and beneficiary are the same person (and are the debtor in a bankruptcy case), the legal protections of the trust are “merged” into the sole trustee and beneficiary, making the debtor the sole beneficial "owner" for purposes of the bankruptcy code.

Thursday, November 4, 2010

I am the Beneficiary of a Trust. Can the Bankruptcy Trustee Take the Trust Assets?

A beneficiary’s interest in a trust may be property of the bankruptcy estate. However, any trust containing spendthrift provisions that make the beneficiary’s interest in the trust non-transferable are protected from the beneficiary’s creditors. 11 U.S.C. 541(c) honors state spendthrift clauses. Therefore, if the trust is properly created under Massachusetts law pertaining to trusts, the bankruptcy code will honor the settelor’s intentions and keep the debtor-beneficiary’s interest in the trust from becoming property of the bankruptcy estate.

Trust beneficiaries should be careful, however. If the settler and beneficiaries are the same, the trust is self-settled, rendering spendthrift provisions unenforceable. Further, if the doctrine of merger applies (described above), the trust will cease to exist and negates the spendthrift protection.

Monday, November 1, 2010

Can I Use My Credit Cards Before Filing for Bankruptcy?

The U.S. Bankruptcy Code at 11 U.S.C. § 523(C) sets forth evidentiary presumptions allowing the bankruptcy trustee or an individual creditor to automatically presume a particular credit card purchase or cash advance is non-dischargeable. If the presumption applies and is not rebutted with evidence introduced by the debtor, the debtor [you] will continue to owe that particular debt.

Specifically, the code states that a debtor’s discharge will specifically exempt from the discharge:

(I) consumer debts owed to a single creditor and aggregating more than $600 (as of April 1, 2010) for luxury goods or services incurred by an individual debtor on or within 90 days before the order for relief under this title are presumed to be nondischargeable; and

(II) cash advances aggregating more than $875 (as of April 1, 2010) that are extensions of consumer credit under an open end credit plan obtained by an individual debtor on or within 70 days before the order for relief under this title, are presumed to be nondischargeable.

As a result of 11 U.S.C. § 523(C), debtors are advised to make no purchases on credit cards in the three months (90 days) prior to their bankruptcy filing in order to ensure that the above presumption does not attach, and significantly reduces the likelihood that the trustee or a creditor will object to the discharge of a particular debt.

Unfortunately, sometimes it is not possible to wait the full 90 days. Some debtors need to seek the protection of the Bankruptcy Court to prevent foreclosure, to stop a pending lawsuit, or prevent repossession of a particular secured asset. In these cases, many debtors will have made recent purchases within the 90-Day period. It is important to discuss these purchases with your bankruptcy attorney, as things like travel, vacations, electronics or computer purchases may all be deemed “luxury” under the statute.

At the §341(a) meeting, nearly all Chapter 7 Trustees in Massachusetts will ask whether a creditor has “used any credit card in the past 30 days prior to filing bankruptcy”. The trustee is attempting to evaluate the likelihood that an 11 U.S.C. § 523(C) Complaint to Object to Discharge will be filed. While use of credit cards in the 30 days prior to filing is not proof of abuse (and grounds for nondischargability), it would raise the trustees suspicions that further investigation is warranted. As such, at Kelsey & Trask, P.C., we recommend that all creditors do not use any credit card or create any new debt in the 30 days prior to filing a Chapter 7 Bankruptcy case.

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