What If You Get an Inheritance during Bankruptcy?

If you are filing for Chapter 7 or 13 bankruptcy, a new inheritance of cash or other assets will alter how your situation will be handled by the bankruptcy court. When you file for bankruptcy, you must declare to the court all assets that you receive, including any inheritance or lottery winnings.

Timing

The timing is very significant when determining how your inheritance will affect your bankruptcy status. If you inherited cash or any type of asset within 180 days from the date of your Chapter 7 or 13 petition filing, the inheritance will be part of the bankruptcy estate. All paperwork and documents that you filed with the bankruptcy court will be amended to reflect the cash or other property you inherit. You can, however petition for exclusions on certain amounts or items to prevent all your inheritance from being auctioned off. The court-appointed trustee has the discretion to decide which assets or amounts will be liquidated. However, if you received the inheritance after the 180-day period, the outcome will be different.

Type of Bankruptcy

Although there are four types of bankruptcy protection under the law, only two are applicable to individuals. These are Chapter 7 (also known as liquidation or straight bankruptcy) and Chapter 13 (also called debt adjustment). The type of bankruptcy you filed is important in determining the effects of an inheritance you receive after beginning the bankruptcy process.

In Chapter 7 protection, the first 180-day period after the filing of bankruptcy is very important. If you receive an inheritance within this period, the entirety of it will go to the trustee. However, if the first 180 days have lapsed, your trustee will no longer have any claim on your inheritance. This means that you will not be obligated to share all or part of your inheritance with your creditors.

If you filed for Chapter 13 protection, however, the effects of the inheritance on your debt adjustment proceedings will be different. In an attempt to be fair to your creditors, the value of what you have inherited will be factored in by the court to ascertain the amount that you must put into your debt adjustment plan. Even if the initial 180 days have already lapsed, your inheritance will still be under your bankruptcy estate because your trustee can argue that good faith on your part involves giving any excess property or funds to your debt repayment plan.

Alternatives to Post Bankruptcy Inheritance

There are ways you can prevent your inheritance from being included in the bankruptcy estate. First off, you do not have to accept your inheritance at all. However, it must be emphasized that the time of acceptance is not the basis by which the court decides whether the assets you inherited will go to your bankruptcy estate. Rather, the date of the death of the person who has given you the assets is what matters. 

If you know in advance that you are likely to come into an inheritance soon, an alternative to refusing the assets you could have inherited is to have your benefactor open a spendthrift account in your name. This type of trust account cannot be claimed by your creditors.

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