What If I Inherit Money After Filing Bankruptcy?

Inheriting money during a bankruptcy can have an impact on the debtor's bankruptcy case. In the eyes of the court, inheritance money is often a windfall for the debtor that could be used to pay off outstanding debts. The exact treatment of the inheritance money depends on several factors, including when the decedent leaving the inheritance died and what type of bankruptcy the debtor filed.

180-Day Rule

The answer to whether an inheritance is included in the bankruptcy estate depends on the decedent's date of death; it does not depend on when the debtor received the inheritance. The bankruptcy laws require a debtor to report inheritances received within 180 days of the bankruptcy. The time period starts when the decedent leaving the inheritance dies and covers the time period before and after filing bankruptcy. Even if a debtor receives the actual inheritance two years after the bankruptcy, if the decedent leaving the inheritance died 180 days within the bankruptcy filing, the debtor must report it.

Inheritance Treatment Varies

How the money will affect the bankruptcy depends on what type of bankruptcy the debtor filed. Under Chapter 7 (liquidation proceedings), the money is typically available for use by the bankruptcy trustee to pay off the debtor's creditors. For Chapter 13 bankruptcies (individual debt adjustment), the bankruptcy court may use the inheritance to determine the amount of an individual's payments under the debt repayment plan; this generally means the inheritance may cause those payments to increase.

Purpose for the Law

It may seem harsh to force a debtor to give up a gift from a loved one who has passed away. The rules are in place, however, to prevent abuse of the proceedings. Bankruptcy courts do not want debtors to file bankruptcy in anticipation of receiving an inheritance with the intent of keeping the inheritance money and becoming debt free. Nonetheless, certain protections are available.

Protecting an Inheritance

Even if the debtor must report an inheritance, the law allows for certain protections. In a Chapter 7 proceeding, for instance, a debtor may be able to use an exemption to protect some, if not all, of the inheritance money. As of March 2011, the federal bankruptcy exemptions allow a "wildcard" exemption allowing debtors to keep any property up to $1,075 or, if the debtor still has some unused exemptions reserved to protect a home, up to $10,125. Additionally, if the decedent placed the debtor's inheritance in a spendthrift trust, the bankruptcy court cannot generally look to that asset because the debtor does not have complete control over it (since it is in trust).

References

• Allmand & Lee: Can Creditors Claim an Inheritance in Bankruptcy?
• Bankruptcy Law Network: What Happens If I Inherit Property While I'm In Bankruptcy?; Dana Wilkinson
• Bankruptcy Law Network: Spendthrift Trusts in Bankruptcy: It's a Question of State Law; Craig Andresen
• Free Advice: Federal Bankruptcy Exemptions