What Happens if I Receive an Inheritance While in Bankruptcy?

St. Louis St. Charles Bankruptcy Attorneys

St. Louis St. Charles Bankruptcy Attorneys (Photo credit: BankruptcyLawyerStL)

Debtors who file bankruptcy and later receive an inheritance need to be aware of federal bankruptcy laws concerning these unexpected gifts. An inheritance can become part of the bankruptcy estate subject to disclosure to the bankruptcy trustee if received within 180 days of filing. Any attempt to hide money from an inheritance while in the process of filing bankruptcy or before it is discharged could be considered fraud and subject to penalties, including prison time.

 

These rules might also apply to married couples when a spouse files bankruptcy and a partner receives an inheritance from a family member. States enforce bankruptcy laws differently depending on whether they recognize common law or community property laws. These situations represent complicated legal matters that require the advice of a competent bankruptcy attorney to protect assets.

 

Bankruptcy courts consider gifts as assets, such as vehicles, property, coin collections, and other inherited items of value. These gifts could become part of the bankruptcy estate and subject to disclosure to the court if received within six months of bankruptcy filing. Advance planning if a relative is ill and expected to die before the 180-day time period could protect an inheritance until the proceeding is finalized, such as setting up certain forms of trusts.

 

The type of bankruptcy filed also determines how assets from an inheritance are handled. People who file bankruptcy to reorganize debt (chapter 13) do not have the six month time limit for reporting an inheritance. In these cases, any assets received after filing becomes part of the bankruptcy estate and must be used to repay creditors as long as the chapter 13 bankruptcy case is still ongoing. The six-month period applies to bankruptcy referred to as Chapter 7 bankruptcy. Chapter 7 and chapter 13 are similar as to the discharge of debt. Both types of bankruptcy discharges unsecured debt, and secured debt for which the collateral is being surrendered. A chapter 7 bankruptcy takes around 4 months to be completed and a chapter 13 takes about three to five years. The debt that can be wiped out in a chapter 13 can be broader and it has other options to deal with secured property which the chapter 7 does not offer.

 

When a debtor files Chapter 13 bankruptcy, debts are reorganized and a percentage of outstanding debt is paid to unsecured creditors depending on assets and income. In most cases the percentage is 0. A person, who receives an inheritance after filing Chapter 13, must disclose an inheritance even if it occurs after 180 days, but the bankruptcy has not been discharged by the court. The assets received from an inheritance usually raise the amount of the percentage of debt that must be repaid. If you need the inheritance to pay for specific bills such as funeral costs or other unexpected and reasonable expenses your bankruptcy attorney can file a motion to retain a portion or all of the inheritance.

Bankruptcy laws do not forbid advance planning if an inheritance is expected before the time limits expire, similar tax planning efforts. Also, no law exists that forces the acceptance of an inheritance if it proves detrimental to a debtor’s overall financial situation. A family member planning to leave assets to a loved one who filed bankruptcy can set up a spendthrift trust that cannot be accessed by creditors. This usually requires legal help to ensure the trust is set up properly and does not violate any laws.

 

Certain exclusions might also apply to assets received in an inheritance. The bankruptcy trustee typically looks at the overall financial situation of the debtor and uses discretion when deciding whether assets should be administered or abandoned from the bankruptcy estate. An inheritance becomes automatically property of the bankruptcy estate, but the chapter 7 trustee might not see a benefit for creditors to sell the inherited asset. Basically, any change in financial status must be reported to the trustee as a matter of law. It is then up to the trustee to make the decision about it.

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