The threat of bankruptcy is never too far when creditor attachment of an estate that has come into effect, proceeds to probate court to satisfy outstanding debt. Estates can also be subject to bankruptcy while the grantor or originating trustee is still living. Chapter 7 (persona)l or Chapter 11 (business) bankruptcy laws imposed on individuals and corporations, are similar with rules of probate where creditor attachment to an estate persists. Probate courts appoint a fiduciary trustee to administer the debt dilution process for resolving credit attachment to an estate. Planned giving specialists will benefit from insight into estate bankruptcy and probate liquidation of trust assets potentially affecting nonprofit charitable giving strategy.
Petition for Chapter 7 or Chapter 11 bankruptcy of an estate is usually accompanied by trust transaction record. Before a bankruptcy petition an estate’s trustee is responsible for trust management and administration of any transactions required to meet outstanding debt in accordance with rules of dilution (11 U.S. Code § 704 – Duties of trustee). Trustees receive a percentage of assets sold as fee for service for administering liquidation transactions. The bankruptcy trustee must review all records of estate’s assets, including market value appraisals, and income tax returns before proceeding to federal bankruptcy court filing. A bankruptcy trustee is responsible for disclosure for all related financial information about the debts, real and personal property, income, and the current state of the estate’s financial affairs in court.
After Chapter 7 or Chapter 11 is filed for an estate, a bankruptcy trustee presides over the mandatory “341 meeting” attended by the executor of the estate or trust. Although creditors do not always attend the meeting, notice permits debt claimant participation in the due diligence process before the bankruptcy is finalized. The trustee has the power to “avoid” or deny improperly executed preferential transfers or security investments made by the decedent debtor, or the estate trust prior to the bankruptcy case. Preferential payment of creditors in lieu of equitable distribution of monies to satisfy outstanding debts, is legal cause for trustee redistribution of those funds. Improperly executed liens made by creditors are example of lawful reason for payment avoidance by an estate, thus alleviating a trust and final beneficiaries of any future obligation.
The issue of intangible assets and intellectual property (“IP”) can complicate an estate bankruptcy or probate liquidation strategy. An estate or trust pursuant of bankruptcy as solution for resolving creditor attachment, cannot auction or short-sale intangible or IP assets. For this reason, it is difficult to lever liquidation as debt dilution solution. IP assets carry registered copyright, patent, or trademark rights requiring consented to agreement for circulation, usuary, or resale. Royalties are not always immediate, making IP assets a sticking point in bankruptcy negotiations depending on an estate’s debt obligations. Estates can protect their beneficiary’s rights to IP asset inheritance, by setting up trust or will directives in advance.
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Creditor attachment can necessitate the filing of a Chapter 7 or Chapter 11 bankruptcy affecting trust assets without the assistance of an attorney experienced in estate litigation.
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