In a Chapter 7^[1] Long Island bankruptcy, known as liquidation bankruptcy, consumers are able to erase certain debt and start over on a fresh financial footing. During the bankruptcy, the trustee generally gathers all of the consumer’s assets and determines which ones qualify for liquidation and once liquidated, the proceeds go to pay off the consumer’s creditors. However, determining which assets qualify for liquidation can be a complicated process.
The expansive language of the Bankruptcy Code attempts to bring as much of the petitioner’s assets into the bankruptcy estate as possible, to satisfy the debts owed. Section 541 of Title 11^[2] of the United States Code (Bankruptcy Code or Code) sets forth that “all property, wherever located and by whomever held, to which the debtor has a legal or equitable interest in” is property of the bankruptcy estate.
Assets Transferred into a Trust
Protecting trust assets which were transferred to a nominee trust, primarily for estate planning purposes creates a unique issue in a Chapter 7 Bankruptcy. When a consumer is filing for bankruptcy and he is a potential beneficiary of a trust that has considerable assets, there are issues that need to be resolved before deciding whether it is likely that the assets of the trust will be included in the bankruptcy liquidation.  First, it must be determined whether the consumer has control over the trust. One way to determine this is by looking at whether the trust is revocable^[3] or irrevocable.
Revocable Trusts in Long Island Bankruptcy
The most common and basic type of trust is a revocable trust. Most revocable trusts give an individual a great deal of control and access to the assets inside the trust until their death. The trust also provides flexibility to change terms inside the trust after it is created as well as the ability to completely revoke it and end its existence.
With a revocable trust, the trust beneficiary does not have any legal claim to the trust assets.  Usually, therefore, a revocable trust is not considered an asset that a consumer controls or can be acquired and liquidated by a trustee in a Chapter 7 bankruptcy proceeding.  This situation is more complicated when the individual filing for bankruptcy is also the trust beneficiary.
Trust Beneficiary Files for Bankruptcy
When the trust beneficiary and the individual filing for bankruptcy protection is the same person, the individual has control over the trust as they are acting in the capacity of the trust grantor.  Because they have control over the trust and the assets held in the trust, it is possible that the revocable trust to be reached by the bankruptcy trustee.
Irrevocable Trust in Long Island Bankruptcy
An irrevocable trust^[4] is one that cannot be modified or terminated without the permission of the beneficiary.  The grantor effectively removes all of his rights of ownership to the assets of the trust after transferring the assets into a trust.  This is the opposite of a revocable trust which allows the grantor to modify the trust.
Beneficiaries may not be able to immediately access the trust, but each beneficiary has a legal right to some portion of those assets.  As with everything, there may be exceptions allowing an individual to still file bankruptcy and protect the trust. For example, a “spendthrift” provision may limit creditor claims to trust assets even when the trust is irrevocable or the grantor has died.
Maker of Irrevocable Trust Files Petition for Bankruptcy
Trust?
If the individual filing for bankruptcy protection is also the trust grantor, he or she has given away assets.  In that instance, the person no longer has rights to the trust and it will not be included in the bankruptcy.
Nassau County Spendthrift Provision
Assets that are at risk are not automatically liquidated.  Bankruptcy laws provide for “spendthrift provisions” that prevent creditors from obtaining the proceeds of the assets in an irrevocable trust or a revocable trust.  If there are multiple beneficiaries of an irrevocable trust, there may also be problems with liquidating the trust in a Chapter 7 bankruptcy.
Disclaiming an Interest in a Suffolk County Trust
Another way to avoid problems is to disclaim any interest in a trust, thereby forever waiving any right to reclaim any of the trust’s assets. A disclaimer^[5] is a renunciation of property passing upon another’s death, whether the assets are to pass by will, pension or insurance beneficiary designation, or by state intestacy laws. For Federal estate, gift, and generation-skipping transfer tax purposes, the renounced property is treated as if it had never been transferred to the person making the qualified disclaimer (the disclaimant). Under New York law, the property passes as if the disclaimant predeceased the decedent. The disclaimed property then passes, either outright or in trust, to the named alternate beneficiary.
Fraudulent Transfer
If you have a trust, or are the beneficiary of a trust, and are considering filing for Chapter 7 bankruptcy protection, it is important to speak to an experienced Long Island bankruptcy attorney as soon as possible.  Ideally, you would consult with a skilled Nassau county bankruptcy attorney before transferring property out of your name and into a trust so that you can review your options to protect the property from a Chapter 7 liquidation.  Otherwise, you may not be effective in protecting the property and you may run the risk of appearing to the trustee that you are attempting to hide property from either the trustee or creditors.  This type of fraudulent transfer can endanger your discharge in Bankruptcy and result in the filing of Federal criminal charges.
In New York section 276 of the Fraudulent Conveyance Act^[6] provides:
“Every conveyance made and every obligation incurred with actual intent, as distinguished from intent presumed in law, to hinder, delay, or defraud either present or future creditors, is fraudulent as to both present and future creditors.”
Contact an Experienced Long Island Bankruptcy Attorney
If your property is subject to liquidation, there are better ways to try and protect it, including the filing a Chapter 13 Bankruptcy which is a form of bankruptcy in which no assets are seized and liquidated.  If you are considering the filing of a bankruptcy, you need a greater Long Island and New York area bankruptcy attorney who can interpret and apply federal and New York laws to best protect your interests. Call the office of Ronald P. Weiss today at (631) 296-0361 in order to discuss the specifics of your financial situation and possible bankruptcy solutions.
References:
^{[1] http://www2.nycbar.org/Publications/pdf/Individual_Bankruptcy_Pamphlet.pdf
[2] http://codes.lp.findlaw.com/uscode/11/5/III/541
[3] http://law.justia.com/codes/new-york/2006/estates-powers-trusts/ept0a7_article7.html
[4] http://www.investopedia.com/terms/i/irrevocabletrust.asp
[5] http://www.nycommunitytrust.org/Portals/0/Uploads/Documents/Public/pronotesMar04.pdf
[6] http://www.nassaubar.org/userfiles/fraudulent_conveyances.pdf}