I receive payments from a trust. Can I keep those after a bankruptcy?

Beware of this issue as this might prevent you from filing.  If you have a trust and you receive regular disbursements from this trust then those disbursements are generally not treated as exempt beyond the allowable exemption amount.  It would make sense that they would be treated like income but they are not.  You have no problem receiving income in a bankruptcy as long as it does not exceed the means test limits.  Trust payments are treated differently though and the bankruptcy trustee can and will take them.

You can keep them as long as they don’t exceed wildcard exemption.   In California the “wildcard” exemption is around $23,000 so you would keep every trust payment up until that limit was reached.  Once the limit was reached the trustee could ask that all trust disbursements be paid to the bankruptcy estate until the debts are all paid.  You would then lose them.

This is an unacceptable situation for most people and one that will cause you extreme distress.  If you receive trust payments then you want to consider carefully whether to file bankruptcy or not.

There is one situation which can save you.  If your trust has a “spendthrift clause” then it may save your disbursements.  These clauses that are put in trusts when they are created prevent trusts from being attached or taken by any creditor.  These clauses also work to prevent the bankruptcy trustee from taking your trust fund payments.  If you have a spendthrift clause in your trust check with your trust attorney and give a copy of your trust to the bankruptcy attorney so he can see it himself and decide whether there your spendthrift clause looks good.

It is very important not to file without this careful consideration of these trusts.  I have seen cases where the trust payments were seized and a settlement of all of the debts had to be paid to the trustee before payments could resume.  Of course you should probably not file for bankruptcy if your trust payments can be seized to pay your debts.  A debt settlement option should then be considered.

I am a bankruptcy lawyer practicing bankruptcy law in San Diego, CA.  For more info. visit my website at www.farquharlaw.com.