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  1. #1
    Join Date
    Feb 2012
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    10

    Default Effect of Chapter 13 Bankruptcy on Loan Payments Owed to a Trust

    My question involves bankruptcy in the state of: Mississippi

    My brother is in the process of filing Chp 13 bankruptcy. He owes my Mom for a $45K promissory note that was placed in her irrevocable trust, both of which were created in March 2014. I am trustee for the trust. Years ago, my Mom loaned him money by getting her own loan in her name and using her land as collateral. There was no note that he signed since it was her loan and her land used as collateral. She just paid off her loan in February and he signed the promisory note in March that was placed in the trust.

    The trust states that my brother is entitled to his share of the land AFTER the loan is paid in full. Any balance outstanding at the time of her death is reduced from his inheritance.

    I don't know anything about bankruptcy, but assuming the $45K note is forgiven by the judge:

    1. Do the terms of the trust still apply meaning does the outstanding loan reduce his inheritance?
    2. What can I do as trustee to carry out my Mom's wishes? Options?
    3. He has verbally promised to continue payments, but I don't think that will be legally binding since he can not re-affirm the debt . How can my Mom be creative to avoid this problem?


    Thanks.

  2. #2
    Join Date
    Sep 2010
    Posts
    19,901

    Default Re: Chp 13 Impact on Loan Payment to Irrevocable Trust

    A chapter 13 bankruptcy doesn't discharge debts, it just stays some actions on the lender's part until the borrower can catch up.
    The only thing the trustee should be doing is making sure the loan is listed in the bankruptcy proceedings. If your brother is playing by the rules, this should have been done. If not, remind him to do so. Other than that, while the bankruptcy is pending the trustee can do nothing (and are required not to bother him about payments).

    Once his plan is set in place, he'll make the payments as directed by the court, his "verbal" promises and even what he wants to do means squat. He has to follow the plan.

    Are you the actual trustee at this point, or just the successor after mom passes?

    There's no "reaffirmation" of debt here, the debt is NOT discharged in chapter 13, just spread out.

    Even if he eventually goes chapter 7, if the loan is not repaid (either because of default or discharge), the trust is not obliged to give him property if the trust documents make it contingent on the loan repayment.

    I'm confused why your mom set up a irrevocable trust for this.

  3. #3
    Join Date
    Oct 2006
    Posts
    16,474

    Default Re: Chp 13 Impact on Loan Payment to Irrevocable Trust

    Quote Quoting gopher
    View Post
    My question involves bankruptcy in the state of: Mississippi

    My brother is in the process of filing Chp 13 bankruptcy. He owes my Mom for a $45K promissory note that was placed in her irrevocable trust, both of which were created in March 2014. I am trustee for the trust. Years ago, my Mom loaned him money by getting her own loan in her name and using her land as collateral. There was no note that he signed since it was her loan and her land used as collateral. She just paid off her loan in February and he signed the promisory note in March that was placed in the trust.

    The trust states that my brother is entitled to his share of the land AFTER the loan is paid in full. Any balance outstanding at the time of her death is reduced from his inheritance.

    I don't know anything about bankruptcy, but assuming the $45K note is forgiven by the judge:

    1. Do the terms of the trust still apply meaning does the outstanding loan reduce his inheritance?
    2. What can I do as trustee to carry out my Mom's wishes? Options?
    3. He has verbally promised to continue payments, but I don't think that will be legally binding since he can not re-affirm the debt . How can my Mom be creative to avoid this problem?


    Thanks.
    In bankruptcy if there is collateral for a discharged debt the creditor is still able to take the collateral, even many years after the bankruptcy. Depending on how the promissory note was written, I suspect that your brother's future inheritance is collateral for the debt, and therefore could still be taken towards any outstanding amount.

  4. #4
    Join Date
    Feb 2012
    Posts
    10

    Default Re: Chp 13 Impact on Loan Payment to Irrevocable Trust

    I am the trustee, and one of the beneficiaries upon death. The trust was not set up strictly for the loan. It was an ordinary strategy to protect assets and sub for a will. The note was referenced in the trust by the lawyer - I guess to support the terms of the trust agreement and also so that the payments go into the trust like the land is in the trust.

    I have not seen anything from a lawyer at this point, but I was told by my brother that he included the loan with his filing. I will await the terms from the lawyer.

    Thanks for the clarification.

  5. #5
    Join Date
    Sep 2005
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    98,846

    Default Re: Chp 13 Impact on Loan Payment to Irrevocable Trust

    Quote Quoting llworking
    View Post
    Depending on how the promissory note was written, I suspect that your brother's future inheritance is collateral for the debt, and therefore could still be taken towards any outstanding amount.
    When it is the intention that an unpaid loan balance be paid out of an inheritance, it makes sense to have an estate planning lawyer review and advise in relation to the promissory note and estate plan, as even when that's the intention it's possible that statute of limitations issues will arise that could prevent the estate from taking an older debt into consideration. With legal assistance, it should be possible to avoid that type of complication. (I'll assume, based on the facts given, that was done in this case.)

  6. #6
    Join Date
    Feb 2012
    Posts
    10

    Default Re: Chp 13 Impact on Loan Payment to Irrevocable Trust

    Does this summary excerpt help?

    The note says if my brother does not pay the note before Mom's death, the balance is an inter vivos gift with the intent that the amount owed be part of his inheritance and subtracted from and be a lien upon assets he may receive from the estate.

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