Bankruptcy and Inheritances

04 Oct Bankruptcy and Inheritances

An often overlooked component of a bankruptcy case is whether the debtor is entitled to receive an inheritance. This can be very, very important because if the debtor becomes entitled to an inheritance within certain times, the inheritance could go to a bankruptcy trustee and the payment of a debtor’s creditors.

Under 11 U.S.C. § 541(a)(5), if a debtor acquires or becomes “entitled” to receive any property through inheritance or as the beneficiary of a life insurance policy or property settlement “within 180 days after” filing for bankruptcy protection, then that property becomes “property of the estate.” What this means is that if a debtor filed a chapter 7 case on January 1, 2011, and the debtor’s father passed away on March 1, 2011, then if the debtor becomes entitled to receive the proceeds from a $50,000.00 life insurance policy, then the trustee can claim those funds as part of the bankruptcy estate.

Similarly, if the debtor is entitled to an inheritance during that time period, the trustee will then be able to take that interest. For example, if the debtor has two siblings and on Day 150 after the debtor filed bankruptcy, the debtor’s mother passed away and left the home place to the three children, the debtor then acquired a 1/3 interest (or whatever specified in the will) in the home place and now the trustee has that interest as part of the bankruptcy estate.

It is important to note that the operative phrase is when the debtor “acquires” or “becomes entitled to acquire” such property within 180 days. If the decedent passed away prior to the debtor filing bankruptcy, the debtor already “acquired” or became entitled to her inheritance even though the debtor has not actually received anything. If the decedent passes away less than 180 days after the debtor filed bankruptcy, then even though the debtor may not receive anything for quite some time (remember the Anna Nicole Smith case and prior case dragged on for over fifteen years!), it is the decedent’s passing that entitled to the debtor to her “inheritance.”

Things are a bit different in a chapter 13 case. Normal chapter 13 cases can go on for several month to up to five years. If a debtor becomes entitled to an inheritance at any time during that time period, the trustee will seek to have the money go to the payment of creditors. That is because under 11 U.S.C. § 1306, “after-acquired” property becomes “property of the bankruptcy estate.”

It is important to know if a debtor is entitled to receive an inheritance or other property such as life insurance proceeds or property settlements. As such, when a debtor is speaking with their bankruptcy counsel, it is important to think about people from whom the debtor is likely to inherit property. It can make a big difference in how a bankruptcy case is handled.

 

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Adrian Lapas, Esq.

I've been practicing bankruptcy law in North Carolina since 1993, and am certified as a specialist in consumer bankruptcy law by the North Carolina State Bar.
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