An increasing number of attorneys are integrating bankruptcy law and estate planning into their own practice in response to the need for stronger asset protection and the growing complexity of financial circumstances, especially during economic downturns and times of economic stress.
Background
Bankruptcy is a legal process that provides individuals and businesses with a way to obtain relief from debts they cannot pay. The two primary forms of bankruptcy are Chapter 7 and Chapter 13. During a Chapter 7 bankruptcy, a trustee may sell non-exempt assets to satisfy creditors, which can put particular personal property at risk of repossession or removal from the debtor. On the other hand, Chapter 13 bankruptcies allow individuals to retain their assets while repaying their debts through a structured repayment plan. Bankruptcy can significantly affect one’s financial standing, and understanding these consequences is crucial for making informed decisions and protecting one’s property and estate.
Whereas, Estate Planning involves creating a plan that determines how your assets will be distributed and how your affairs will be managed after you pass away or become incapacitated, unable to handle them yourself. Put simply, estate planning is a legal process that allows you to make plans and instructions for how you want your assets and estate distributed, handled, managed, or preserved after your death.
Bankruptcy and estate planning intersect in many ways; thus, careful planning can potentially minimize risks and ultimately impact someone’s future in circumstances involving bankruptcy. At the same time, past and present bankruptcies can affect estate planning decisions.
The Klein Family Trust
In 2025, a federal Bankruptcy Appellate Panel decision from the Ninth Circuit involved a trust dispute that could shift the trajectory of estate planning. Leslie and Erika Klein created a living trust that, after the first spouse’s death, would split into two separate trusts. Including the Credit Shelter Trust, which was to hold most or all of the deceased spouse’s share of their community property to protect assets from claims and benefit their children. Erika passed away first, but Leslie never divided the trust like he was supposed to. He later remarried and signed a prenuptial agreement that promised his new wife a life interest in the family home; however, he did not transfer title or formally create a life estate because the house had already been retitled into the trust. In the end, Leslie filed for bankruptcy with $32 million in debt and a $10 million home in the Klein trust. Nevertheless, the Bankruptcy Court held the entire home (except for its $189,050 state exemption) as part of the bankruptcy estate, which means it is available to creditors. Leslie had three core arguments here: (1) since half of the house was owned by the Credit Shelter Trust, it is shielded because it was not “his” own asset; (2) his current wife had a life estate protected by the prenup; and (3) his children (the beneficiaries) should be joined as parties because of their rights.
However, the Appellate Court rejected all of Leslie’s arguments. The court found that since the trust division never occurred, he owned the entire house and acted as such an owner. Additionally, the spendthrift clause in the trust did not protect a self-settled trust, and, again, the prenup did not create a valid life estate because nothing was recorded. A spendthrift clause is a provision in a trust that protects the beneficiary’s future benefits by prohibiting them from voluntarily assigning, selling, or borrowing those benefits, which has the effect of shielding those trust assets from most of the beneficiary’s creditors. Lastly, the court also found that he had significant discretion and broad control over all trust assets, including access to the bankruptcy trustee because he was the successor trustee.
Overall, the Klein family’s story illustrates how bankruptcy courts treat estate planning arrangements differently than expected, especially where trust actions and funding steps are left incomplete. Results like this surprise many estate planning attorneys because bankruptcy courts evaluate trusts through a different lens. As a result, understanding the intersection of bankruptcy and estate planning law is essential to structuring plans that will actually withstand scrutiny and provide meaningful protection in bankruptcy.
The Rise in Bankruptcies and the Number of People Lacking Estate Plans
The mistakes made in the Klein Trust may affect more families than ever before as CBS News and U.S. bankruptcy filing data reports that there was a 12% increase in bankruptcy filings from 2024 to 2025 with 478,752 in 2024 to 533,949 in 2025. Many of these bankruptcies are attributable to rising medical insurance costs, credit card debt, and student loan debt. Additionally, inflation has played a significant role in Americans’ inability to cover all their daily expenses. Total filings had decreased steadily for over a decade, falling from almost 1.6 million in September 2010 to just 380,634 in June 2022. Yet filings have steadily been increasing each quarter since then.
Furthermore, most Americans lack estate plans such as a will, trust, or any kind of advanced directives. Only 31% of Americans have a will, and 11% of Americans have a trust. However, the most striking finding is that 55% of Americans have no estate plan whatsoever. This increase in bankruptcies and the low rate of estate planning preparedness, highlights a significant gap in financial preparedness in the United States. Bankruptcy and Estate Planning are often viewed separately. Still, when coordinated, they can help individuals both resolve immediate financial distress and also plan for long-term asset protection and family security.
The Connection Between Bankruptcy and Estate Planning
Bankruptcy does not end your legacy, and estate planning can help preserve it. Biggs Law Firm recognizes the strong connection between bankruptcy and Estate Planning. In their firm’s experience, many clients are surprised to learn that some decisions made during bankruptcy filing have lasting effects on their estate plans. There are numerous ways these two areas of law intersect: asset protection, trusts and bankruptcy, inheritance timing, and managing family members’ finances. In terms of asset protection, certain assets can be protected during bankruptcy through state exemptions. These same exempted assets can serve as a cornerstone of an effective estate plan. Thus, understanding which assets are shielded from bankruptcy helps ensure resources are preserved for your beneficiaries. On the other hand, if you are entitled to receive an inheritance during or shortly before filing for bankruptcy, complex legal issues can arise, and this can affect potential bankruptcy discharges.
Alternatively, starting with an estate plan can yield tremendous benefits if a client reaches a crossroads and must file for bankruptcy. Trusts can be created before financial trouble arises and add certain protections in bankruptcy. In contrast, other assets may be treated as part of the bankruptcy estate, and timing and structure are critical. Furthermore, in everyday practice, it is common for older parents to add children as joint owners of bank accounts for estate planning or to assist with financial management. However, doing this can expose those funds to a child’s creditors, if they were to file for bankruptcy and can inadvertently put certain family assets at risk. Thus, understanding one’s estate and financial situation can help protect not only one’s own assets but also one’s children’s future assets.
How Estate Planning Can Protect from Bankruptcy
Estate planning ahead of time can help implement tactics that protect your property and assets when bankruptcy is inevitable. Estate Planning offers several strategies to help shield assets from future creditors in the event of a bankruptcy filing. These include irrevocable trusts, spendthrift trusts, retirement accounts, and exemptions. If the Klein family had used these tactics correctly, certain creditors may have lacked access to certain property. When planning, recognizing these different strategies for protecting assets far in advance, while remaining truthful, can help if faced with the threat of bankruptcy.
Furthermore, estate planning is vital and has legacy implications. Many firms combine the two areas of law to support rebuilding your estate plan after bankruptcy. Understanding exemptions and what matters most to every family is an essential insight into Estate Planning that can be learned from Bankruptcy. Looking at this rebuilding as interconnected can help with reconstruction and ensure an estate plan lasts for your family and future generations.
