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How does a trust file for bankruptcy?

On Behalf of | Nov 17, 2021 | Bankruptcy

Bankruptcy, in most cases, isn’t an option for a legal trust. A personal trust is one that you open and is also named the beneficiary of. In Texas, a personal trust leaves its owner personally liable, which disables the trust from holding your debt. The trust can buy, sell and even manage the property, but a personal trust itself can’t file for bankruptcy.

The legal debtor

A personal trust cannot legally become a debtor because the person owning it becomes the living debtor. To file for bankruptcy, a debtor has to be named. This person or entity must have the legal standing to own debt. Personal trusts can’t own debt but can be used to pay off debt.

Seizure of a revocable trust

A revocable trust is a personal agreement that can be seized to pay off debts. This type of trust often, though not always, has its owner as of the beneficiary. Such a trust is easy to collect because the owner of it has personal liability. Their liability is due to them being both trustor and beneficiary.

The business trust

Since a business trust is recognized as a corporate entity, it can, like a corporation, file for bankruptcy. The beneficiaries of this trust are protected from personal liability. The business held within the trust is what’s liable for its own debts. If such a business can’t pay its debt even if the business were sold, then bankruptcy becomes a legal option.

Bankruptcies in Texas

Making preparations for the unexpected calls for a financial plan. A trust gives you an option to redirect the personal liability of bankruptcy to the business you own.