Bankruptcy proceedings require the debtor (the person who filed for bankruptcy) to declare all assets and debts to the bankruptcy trustee (the person overseeing the proceedings). A special situation occurs when a debtor receives an inheritance after filing bankruptcy papers. If a person giving you the inheritance dies within 180 days after you file the petition, you must report the inheritance to the bankruptcy trustee. In Chapter 7 cases, the funds from the inheritance become part of the bankruptcy estate. In Chapter 13 cases, the amount is used to calculate the debtor’s repayment plan. Proactive steps are required to protect an inheritance if you plan on filing for bankruptcy.
Avoid filing Chapter 7 bankruptcy if you believe you will inherit a sum of money during your bankruptcy process. Under Chapter 7, the inheritance becomes part of the bankruptcy estate and is used to pay your creditors. However, under Chapter 13, the inheritance becomes a factor in determining your debt repayment plan and amount, and you may be able to keep all or some of it.
Check your state’s current exemption laws and exempt the inheritance if possible. Your state may or may not allow you to exempt inheritance money or assets. Exemptions may change in the future; check your state's current exemptions and protect your inheritance if possible.
Ask to have your inheritance placed in a spendthrift trust. If you are expecting an inheritance from a relative, you could discuss how to handle your expected inheritance with your relative and have it placed in a trust. A spendthrift trust can protect the money from your creditors.
Refuse the inheritance and have it pass to someone else if none of the above options is possible. While this means that you will not receive the money, it does mean that the money will not be used to pay off your debt and someone else in your family can use it.