A personal trust cannot file for protection under the U.S. Bankruptcy Code. However, a trust that meets the definition of a business trust under the Bankruptcy Code is considered a debtor and can apply for bankruptcy protection.
Personal Trusts
The U.S. Bankruptcy Code is very specific regarding the definition of a debtor that qualifies for bankruptcy relief. Other than businesses, only a person that is a resident, owns property, or has a place of business in the United States qualifies under the Code. The grantor or a beneficiary of a trust may file for bankruptcy as an individual, but the trust as an entity does not qualify. If the trust is a revocable grantor trust then the grantor is the beneficial owner of the assets, which means the assets can be subject to seizure and liquidation under the Bankruptcy Code.
Business Trusts
The Bankruptcy Code defines business trust under the definition of corporation, and corporations may file for bankruptcy. The beneficiaries of a business trust have limited liability as long as the interested parties to the trust follow the rules regarding administration and run the trust as a business.
Insolvent Trusts
Personal trust interested parties who wish to explore bankruptcy typically do so as a result of trust insolvency or debt. For example, a cash-poor trust with real estate may not be able to pay any mortgage or taxes associated with the property and cannot sell the property for enough cash to settle the associated debt. In these situations court action is required to settle any outstanding debts and terminate the trust. Notification to the creditors and beneficiaries occurs through the court process.
Seek Advice
Trusts with debt and insolvency issues would be prudent to seek the advice of an experienced trust lawyer for assistance. Settling the outstanding debts for these types of trusts is complicated and subject to state law, which varies by state.