Treatment of Property Acquired Within 180 Days After Filing for Bankruptcy

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DSC00213 (Photo credit: BankruptcyLawyerStL)

After filing for a Chapter 7 or Chapter 13, individuals may inherit real estate or other forms of personal property. Everything that the debtor owns at the time of filing becomes part of the bankruptcy estate and will be administered by the trustee. The property and its value are known to the debtor and his bankruptcy attorney before filing and bankruptcy planning can be done. Sometimes, non-exempt equity might be transferred into exempt assets without a fraudulent transfer, sometimes spending non-exempt assets or waiting can help maximizing the benefits of the bankruptcy filing to the debtor. An inheritance after filing, is often unexpected and even the value of the inheritance is often not immediately known. An inheritance becomes part of the bankruptcy estate within 180 days after filing of the bankruptcy petition. The trustee must be notified and will decide whether to administer the new asset.

Sometimes, real property is being inherited together with several other heirs. The trustee might accept an offer made by the debtor or by another heir to purchase the trustee’s interest (debtor’s share) from the bankruptcy estate. Such a purchase might be for less than the actual value of debtor’s share. If the trustee cannot sell the bankruptcy’s interest to one of the heirs, he can either try to sell the whole real property and pay each heir their share or abandon the estate’s interest in the property.

Debtors often have little of none exemptions to protect an inheritance. A homestead exemption can only be used for the residence of the debtor, not for rental property or real property inherited.

Debtor should amend the bankruptcy schedules and notify the trustee as soon as the inheritance becomes known to debtor.

In the case the debtor wishes to keep the property which he inherited but is financially not able to make the trustee an offer, debtor might be able to convert the case to a chapter 13 and pay the non-exempt equity over up to five years to the chapter 13 trustee. Dismissing the chapter 7 case is not an option at this point. If debtor has non-exempt equity the trustee wants to administer, the chapter 7 trustee would object to a motion to dismiss the case.

There are three types of property that may be included in a bankruptcy estate. The first and most common type of property that may be included in a bankruptcy estate is property that is acquired by the debtor through inheritance. Debtors will commonly inherit property through bequest, devise or inheritance after a loved one has passed away. Unfortunately, when this property is acquired within 6 months of filing for bankruptcy, it will be included in the bankruptcy estate and can be liquidated to pay off creditors.

There are a couple ways that people can circumvent the effects of filing for bankruptcy upon the inheritance that they will ultimately receive from a spouse or parent upon their death. When property passes to a debtor through a joint tenancy with right of survivorship, then this type of property will not become part of the bankruptcy estate under §541(a)(5). Another common scenario in which a person’s property will not become part of the bankruptcy estate is when property passes to the debtor through an entireties estate when the joint tenant dies. These are two ways that debtors can strategically plan to avoid any undue and harmful effects of bankruptcy with the help of a lawyer.

When property has been obtained through a settlement agreement after divorce, then the spouse receiving the property may have to include this in his or her bankruptcy estate. The only way that property in a divorce proceeding will be exempt from an estate is when property is awarded as alimony payments to provide for the support and maintenance of a spouse.

Even property that is received by the beneficiary of a life insurance policy may be included in a bankruptcy estate. A beneficiary may be forced to hand over his or her property to the bankruptcy estate. The life insurance proceeds will be used to pay off the creditors of the beneficiary spouse.

State law will control many of the issues in cases that dispute the time in which a property interest became property of the estate or when a debtor was able to become entitled to a property interest. These issues are handled by bankruptcy courts quite frequently, as evidenced by the case of Matter of Chenoweth in the Seventh Circuit Court of Appeals. In that Illinois case, the court determined that a debtor was entitled to receive an inheritance upon the date of a testator’s death as opposed to the date in which the will was entered into probate courts. Under §541(a)(5), property that is acquired by the debtor outside of the 180 days following a bankruptcy petition will not be included in the estate.

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