Can a trust prevent bankruptcy?
In a word, No! So what do we mean by the Asset Protection function of trusts?
One important function of a living trust is to protect assets from your creditors if you should be bankrupt, or even if you should be attacked by your creditors.
There are three important things to remember –
1) The trustees must never sign surety for any of your personal debts, because the firewall would break down for that creditor.
2) If the creditor is on the trust’s side of the firewall (such as when the trust takes out a bond), then the related assets are not protected.
3) If you sell assets to the trust, then the trust owes you the purchase price and that debt is one of your personal assets and can be attacked by your creditors.
In other words, it doesn’t stop you being bankrupt, it just ensures that the creditors can’t take what doesn’t belong to you.