What Happens to Trust Funds in Bankruptcy?
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Trust Funds in Bankruptcy

Trust funds represent a somewhat murky area of bankruptcy law. On one hand, trust funds may be protected from collection by creditors in bankruptcy because they are funds specifically reserved for another party.

However, bankruptcy courts are sometimes suspicious of money that is moved into a trust for the express purpose of shielding assets from creditors in bankruptcy.

To learn more about how bankruptcy may treat your trust fund, speak with a local attorney for a free case evaluation by filling out the quick form below.

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Trust Funds for Minors in Bankruptcy

Trusts are created to protect assets, such as physical property or cash. Placing assets in a trust simply means that the trust owns the assets, rather than the individual.

A very common form of trust involves money set aside for children. This often includes:

  • Parents or grandparents set money aside in a trust for children or grandchildren.
  • When this occurs, the person creating the trust has little or no access to the funds, because they are reserved for someone else.
  • As a result, bankruptcy courts often do not allow creditors to go after the minor’s trust fund, if the bankruptcy action is against the original creator of the trust.

This scenario is fairly common, but the protection of such trusts does vary according to state bankruptcy law.

A local bankruptcy lawyer may provide more information about your unique trust fund and how it will be treated in bankruptcy.

Creating Trust Funds for Bankruptcy

A less legally sound tactic is to create a trust fund for the express purpose of keeping funds out of the hands of creditors.

This strategy is not recommended, as it may irk a bankruptcy court and lead to more harm than gain. It could also be considered bankruptcy fraud, which is a serious, and often criminal, offense.

In fact, if an individual places assets in a trust with bankruptcy in mind, creditors may still be able to get to the money by:

  • Claiming the transaction was fraudulent.
  • Collecting interest gained on the trust, if the interest is deemed to be part of the filer's income.

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