The effect of an inheritance while you are in bankruptcy depends on timing. If you inherit within 180 days of the date your petition is filed, that inheritance will become property of your bankruptcy estate. You will be required to bring that matter to the attention of the court and your trustee by amending the paperwork filed with the court to disclose the inheritance. It does not matter that you might not actually receive anything for months or years. The key date is when your loved one passed away. In a Chapter 7 case, if the inheritance came in the first 180 days after your case was filed, it will go to the trustee, absent any exemptions that might protect all or part of it. In a Chapter 13, the value of the inheritance will be used to determine, in part, how much you must pay into a Chapter 13 plan in order to be fair to your creditors.
If the inheritance is received after that initial 180 day period, the effect is different. In a Chapter 7, the trustee would have no claim to it, and you would be able to keep it without sharing it with your creditors (unless you choose to do so). If you are in a Chapter 13 case, however, the answer is different. It may still be property of your bankruptcy estate in a Chapter 13. In addition, your Chapter 13 trustee may also contend that good faith requires devoting any excess funds or property to the plan.
Why six months? The provision is intended to discourage those who anticipate an inheritance filing bankruptcy when they think death is imminent. In other words, if you decide to file bankruptcy because Great-Aunt Myrtle is on her deathbed and has named you in her will, you may not get to keep your inheritance. The thinking is that death is not all that predictable outside six months.
If you are in financial difficulties and want to be sure to protect your family’s wealth and heirlooms, there is a fairly simple solution. Suggest that instead of leaving you property in a will or otherwise, that a trust be created in your favor. Such trusts are called “spendthrift” trusts, and are designed to give the trust beneficiary the use of property without making that property subject to the claims of creditors. Many people assume that trusts are for the very rich, but they are not that hard (or expensive) to set up, and can prevent creditors reaching the family farm, the family heirlooms, or the family cash.
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Last modified: October 14, 2007