We are going to discuss a situation where debtor files for Chapter 7 relief, and while his petition is pending, debtor finds out that he is the beneficiary and recipient of money from a trust. To illustrate, debtor files for Chapter 7 relief to wipe out $500,000 of medical bills incurred for cancer treatment. Debtor is unaware that his rich uncle had set up a trust naming debtor as one of the beneficiaries to receive $50,000. The uncle dies while debtor’s chapter 7 case is pending and the trust sends debtor a certified check for $50,000. The question is: does the chapter 7 trustee have the power to get the $50,000 check on behalf of the debtor’s bankruptcy estate to be used to pay part of debtor’s medical bills?

Section 541(c)(2) of the bankruptcy code says that “A restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable non-bankruptcy law is enforceable in a case under this title.” Thus, a trust distribution to debtor is not part of the bankruptcy estate and not subject to the turnover power of the chapter 7 trustee provided the trust is valid and enforceable under applicable non-bankruptcy law. This is quite clear. But bankruptcy trustees go hog wild when they see money with the debtor’s name on it because that is the nature of their job, to get debtor’s nonexempt assets so creditors can get some payment.

The only available argument for a chapter 7 trustee who wants to get the $50,000 is to argue that the $50,000 is debtor’s inheritance because an inheritance is not an exempt asset in bankruptcy. Who is correct? Is the $50,000 inheritance or is it a trust distribution?

《楊清泉律師專欄》TRUST DISTRIBUTION IS NOT PART OF BANKRUPTCY ESTATE(PART II)