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Brent Blanchard
Brent Blanchard, Bankruptcy Attorney
Category: Bankruptcy Law
Satisfied Customers: 1975
Experience:  Twelve years experience in all aspects of debtor & creditor BK.
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I am considering filing bankruptcy. I am an only child and

Resolved Question:

I am considering filing bankruptcy. I am an only child and will inherit my parents' assets. They have a revokable living trust. If during the 7 years I am "in bankruptcy" can anything inherited via the Trust be seized to pay for debts? Is there a way to protect these assets if something happens during that 7-year period to my parents? Thank you.
Submitted: 8 years ago.
Category: Bankruptcy Law
Expert:  Brent Blanchard replied 8 years ago.
You deserve a lot of credit for thinking ahead,Customer

You are not really "in" bankruptcy for seven years. It would be five years if your income is high enough to push you into a Chapter 13 (and your secured and unsecured debts are low enough to NOT push you into a Chapter 11.). If you are in a Chapter 7, the process takes about four months most of the time, and any inheritance you receive goes to creditors only if it happens within six months of filing your case.

The new law prevents you from filing a new Chapter 7 case for eight years. The old rule was six years, which most people rounded up to seven. There are also old rumors that the BK appears on your credit report for seven years, but it actually can appear for up to ten.

A BK on your credit report is far less important than your current income and debt load. Most of my clients can start rebuilding their credit following BK starting as soon as a year and a half later (new credit card offers start coming in unless you're on LifeLock or have a fraud alert on your credit report). How long after that it takes to get back to the same credit score you had before is up to you and your financial fortunes.

Thank you.


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Customer: replied 8 years ago.
Thank you. What if I file Chapter 13? How does that affect any inheritance I would receive from my parents? I also have a revokable living trust. If I put any inheritance in that account, would it be able to be taken to pay credit debts? Does that also apply to life insurance? For example, if either my spouse or myself died during the 5-7 time period, would the death benefit be forfeited to creditors?
Expert:  Brent Blanchard replied 8 years ago.
Chapter 13 exposes the inheritance to being taken for the creditors for the entire length of the Plan. Five years (there are some circuits which *are* allowing shorter plans, but I'm not keeping track of those exceptions) is a lot longer than six months.

Life insurance proceeds belong to the beneficiary, NOT the BK estate. Mistakes in keeping track of which beneficiaries are still alive can result in the proceeds being dumped back into the Probate Estate (owned by the dead guy after death) and could be claimed by creditors during settlement of the probate/non-probate estate, but otherwise they would not become part of the bankruptcy estate.

A living trust does NOT provide any protection from creditors. By definition, they are not only revocable at whim during your lifetime, they are (and this is the key) for the benefit of the person who created the trust and put funds into it. Same rules for creditors whether BK is filed or not, and all assets of such trusts are assets of the BK estate.

If you are dead-set on asset protection, the techniques are beyond the scope of these questions, but in general they include converting assets into "safe" forms which cannot be executed on such as equity in the house (However, the homestead exemption is almost criminally small in many states, and is limited for BK purposes to $125,000 anyway.), tax-qualified retirement funds (limits on how much you can put in them each year, unless you have a business structure that allows some rather large annual contributions) which are protected to varying amounts depending on state law, other assets under state law, and sometimes even IRREVOCABLE trusts for your benefit and which you no cannot control (strict rules surround these). Offshore trusts are rarely worth the trouble unless you're talking about millions of dollars in total assets. There is also the question as to whether your state has its own BK exemptions (an "opt-out" state), or if your legislature chose to "opt in" to the rather skimpy default federal BK law exemptions.

This should give you the general lay of the land surrounding BK law.

Thank you.

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