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socrateaser
socrateaser, Attorney
Category: Bankruptcy Law
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Experience:  Attorney and Real Estate Broker -- Retired (mostly)
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My father is the recipient of a nontransferable irrovacable

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My father is the recipient of a nontransferable irrovacable living trust. He receives quarterly payments from the interest of the trust. Upon his death, the principal will go to a charity organization. Due to his business (antiques dealer) he has to declare bankruptcy. He has filed for Chapter 7 in Alabama. The Trustee has stated that my father has to turn the trust over to the Trustee to pay creditors. The person in charge of the trust has stated that the trust can not be transfered. Can the trustee force my father to make quarterly payments to the trustee to pay the creditors (wouldn't that be outside the scope of a Chapter 7?) If this is true- how do we withdraw the bankruptcy petition since it defeats the purpose of the bankruptcy.
Submitted: 4 years ago.
Category: Bankruptcy Law
Expert:  socrateaser replied 4 years ago.

Provisions that restrict the voluntary or involuntary transfer of a debtor's beneficial interest in a trust ("spendthrift" provisions), if enforceable under applicable nonbankruptcy law, are enforceable in bankruptcy proceedings, thus excluding the interest from the bankruptcy estate. See 11 USCA § 541(c)(2); United States I.R.S. v. Snyder (9th Cir. 2003) 343 F.3d 1171, 1178.

In plain English, if under Alabama law, a creditor could not reach the trust's assets or income, then neither can the bankruptcy trustee. In order to definitively resolve the question, the trust provisions must be CAREFULLY read and compared to Alabama case law and statute to determine whether or not a creditor could reach your father's interests. If there is ambiguity, then it would be something that the bankruptcy court would have to decide.

To obtain a court order, the bankruptcy trustee must commence an "adversary proceeding" against your father. This is a full-blown lawsuit, except in bankruptcy court, and the litigation costs can be stiff -- both for you and for the trustee. So, there is a bit of room for leverage here, because unless there is a ton of dough in the trust, and a real good chance of winning, then the banrkruptcy trustee may decide not to sue.

 

Your bankruptcy attorney, in conjunction with a good estate law attorney, could probably figure out the odds of the bankruptcy trustee winning (I'm pretty sure, I could tell you if I were looking at the trust instrument -- but I'd probably charge $1,000 for the research and time necessary to be able to call it one way or the other).

 

In contrast the cost of the lawsuit could easily run $10,000 on each side. So that's where the negotiating comes in.

 

As far as dismissing the Chapter 7, that's not as easy as it may seem. The court has the final say as to whether to permit a dismissal, and frequently the court won't permit it, if to do so prejudices the debtor's unsecured creditors. In other words, if the court thinks that the trust property can be reached by the bankruptcy trustee, then the court is likely to refuse the dismissal -- at which point, your father will be stuck with either litigating, or surrendering the trust property to the bankruptcy trustee.

 

Note: if the bankruptcy lawyer knew about this trust before your father filed, then not carefully investigating the possibility that the trust property would be taken by the trustee is, in my opinion, malpractice, and your father may have a lawsuit against his attorney.

 

For a legal malpractice lawyer referral, see: http://www.abanet.org/legalservices/lris/directory/main.cfm?id=AL and www.martindale.com.

 

Hope this helps.

 

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socrateaser, Attorney
Category: Bankruptcy Law
Satisfied Customers: 34860
Experience: Attorney and Real Estate Broker -- Retired (mostly)
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Attorney and Real Estate Broker -- Retired (mostly)