Wisconsin residents seeking bankruptcy protect should find out if their trusts are revocable or irrevocable, according to a Bankrate bankruptcy adviser in a recent piece. In a bankruptcy case, a trustee, who is an individual presiding over the petition, looks for any assets to sell. The money from the sold assets is given to creditors to pay off the unsecured debts. Some assets that can't be sold are called "exempted" because they are protected.
In a revocable trust, the trust beneficiary, or person waiting to receive the trust, does not have immediate control of it. Instead, the person who is the creator of the trust, called a grantor, has control. Only when the grantor does the trust beneficiary can decide what happens to it. With an irrevocable trust, the grantor has transferred all the rights to the trust beneficiary. He or she has no control of the assets. How does this affect a Chapter 7 bankruptcy?
In a Chapter 7 bankruptcy, the trustee looks for assets to sell to pay back creditors. The trustee can't use the assets in an irrevocable trust because the debtor, or person filing Chapter 7, does not have control of it. However, a revocable trust may be an option for a trustee looking for sellable assets.
Bankruptcy is a way to help individuals dealing with financial hardship get back on their feet and make a fresh start. There are exceptions that allow Wisconsin residents to file Chapter 7 bankruptcy and still protect their trusts. People interested in filing Chapter 7 to get rid of unsecured debt should talk with a skilled bankruptcy lawyer, who may be able to help people understand if their trusts may be part of their petition or not.
Source: Fox Business, "Is a trust untouchable in bankruptcy?," Justin Harelik, April 09, 2013