Filing a bankruptcy for a trust

On Behalf of | Mar 8, 2022 | Bankruptcy |

A trustor or trustee who is in debt might consider filing for bankruptcy in New Jersey. It’s important to know if and how a trust qualifies for bankruptcy.

Qualifying for bankruptcy

The U.S. Bankruptcy Code states that an individual can file for bankruptcy for a business trust but not a personal trust. In addition, an individual can file, but a business entity cannot. An individual qualifies as a U.S. property-owning resident who owns a business in the United States.

Seizure of assets

If a bankruptcy is filed, a trustor may risk the seizure and disposal of personal assets. Creditors can still take actions against trustors who are in debt. To prevent this, some trusts include stipulations to prevent its assets from being seized by creditors after a bankruptcy is filed.

Insolvent trusts

An insolvent trust undergoes bankruptcy when a court determines that its funds are insufficient to be distributed because the liabilities exceed the assets. As a result, the trustee cannot sell the property, pay taxes or settle any debts. The court has to decide to end the trust and notify the beneficiaries.

When a trust is not protected

A trust is designed to preserve an individual’s property and assets for a later time. Ideally, no one is given access to the property and funds until after the trustor dies. However, this is not always true if the trustor owes debts and files for bankruptcy. Depending on the type of trust and the state’s bankruptcy laws, a trust is not wholly protected from having its assets seized or liquidated. If a person is considering filing for bankruptcy, it’s important to learn about the pros and cons of this action.