There are some instances where filing a bankruptcy case is not the best option. A client may have too much equity in their home, which would require them to file a Chapter 13, instead of a Chapter 7 bankruptcy case. A Chapter 13 bankruptcy allows the Debtor to retain property so long as the Ch 13 Plan provides for payment of an amount to general unsecured and non-priority creditors equal to the amount of equity that is not protected by an exemption. This becomes a problem when the client does not have enough income to pay this amount within the confines of a Sixty (60) month Ch 13 Plan.
A possible solution to this problem is to set up an Irrevocable Trust. An Irrevocable Trust is a legal entity which can hold the Debtor's non exempt property while providing that the Debtor is a life tenant of the property. The Trust must be set up as "irrevocable" so that creditors cannot make a claim on the Debtor's power of appointment which makes a standard Living Trust an unworkable option.
The downsides of setting up an Irrevocable Trust is that the terms of the Trust are permanent, including the designation of the beneficiaries. If the Irrevocable Trust is set up after the Debtor gets too far behind on his or her obligations, a creditor may have a claim for "fraudulent transfer" to the Irrevocable Trust. Timing, therefore, is important. This setup is more appropriate for clients who are at or passed "retirement age," or the age when they become eligible for Social Security.
This is just one alternative option for a Debtor that may be available for someone who is asset rich but income poor.