When The Person You Have A Judgment Against Has His Property Tied Up In A Trust: What Then?

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In earlier posts, I’ve discussed how time-consuming and frustrating it can be to collect on a money judgment.  The primary creditor enforcement methods include freezing the debtor’s bank accounts, garnishing his wages, and liening his real estate by recording the judgment in the county where his land is located.  Recording a lien against a debtor’s real estate is an especially strong tactic.  Once a creditor records the judgment, he can sue to foreclose the property and force its sale.  But where a debtor has no assets or source of income, the judgment is worthless. 

Adding yet another layer of difficulty to the collection process is where a debtor’s property is sheltered in a trust.  The most common scenario I encounter this in my practice is with real estate held in a land trust.  Typically, the property will be owned by a trustee (usually a bank) and lived in by the debtor who most likely is the trust beneficiary. 

In Illinois, a debtor’s beneficial interest in a land trust is regarded as personal property: he (the debtor) doesn’t possess a direct ownership interest in the trust real estate.  The practical effect: you can’t lien the real estate by recording the judgment since the trust – not the debtor – owns the land.  The debtor’s beneficial interest in a land trust is considered intangible personal (not real) property.  

Illinois’ post-judgment statutory scheme expressly allows a creditor to impress a lien on a debtor’s intangible property via the citation to discover assets.  Once a citation is served on the debtor, the judgment becomes a lien on all of a debtor’s nonexempt personal property (including a beneficial interest in a land trust) on the date the citation is served. 

The citation results in the judgment binding the debtor’s personal property (everything that’s not land basically: cars, jewelry, stereo equipment, stocks, bonds, etc.) in his possession or which later comes into his possession before the citation expires.  735 ILCS 5/2-1402(m)(1). 

Code Section 2-1403 (735 ILCS 5/2-1403) provides that no court can order the satisfaction of any judgment out of property held in trust if (a) the trust was created in good faith; and (b) created by someone other than the debtor.  So, if the trust was created by a third party, the trust property is protected from creditors.  However, once any trust property is distributed “out of” the trust, the creditor can attach and lien the disbursement.

Creditor’s counsel should be leery of property held in trust for the debtor’s benefit and be cognizant of other standard exemptions (property that creditor’s can’t touch) like pension funds, retirement accounts, unemployment benefits, etc. 

Assuming there is no fraud or other suspicious circumstances surrounding the trust’s creation, the trust property will be shielded from creditors.  However, once the trust income is disbursed to the debtor, it’s fair game.  The creditor should then promptly move for a turnover order or ask the court to impress a judicial lien on the trust funds being distributed to the debtor. 

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PaulP

Litigation attorney at Fisher Kanaris, P.C. representing businesses and individuals in all types of commercial disputes.