What Happens If I Inherit Money After Filing Bankruptcy?

28 Sep What Happens If I Inherit Money After Filing Bankruptcy?

When a person files for bankruptcy under Chapter 7 or Chapter 13, all of their assets are now under the control of the bankruptcy trustee (or bankruptcy administrator in some states).   This loss of control is a trade-off for being able to discharge most, if not all, debts.  The instant one files for bankruptcy, a bankruptcy estate is created.  The Bankruptcy Code provides that the bankruptcy estate is “comprised of all the following property, wherever located and by whomever held: (1) Except as provided in subsections (b) and (c)(2) of this section, all legal or equitable interests of the debtor in property as of the commencement of the case.” 11 U.S.C. § 541(a)(1) (2008). Property of the estate also includes a]ny interest in property that would have been property of the estate if such interest had been an interest of the debtor on the date of the filing of the petition, and that the debtor acquires or becomes entitled to acquire within 180 days after such date—That estate consists of all assets that exist at the moment bankruptcy is filed….with few exceptions.   One exception is the right to receive, by inheritance or bequest, property of a decedent when that right happens either before filing or within 180 days of filing bankruptcy.   Most of the time, debtors can protect their personal or real property through the use of exemptions provided by either bankruptcy law or state law (Oregon does not use the United States Bankruptcy Code exemptions but has its own state exemptions.)

(A) by bequest, devise, or inheritance.

Example:   You filed bankruptcy on January 1, 2009.   Your bankruptcy case had no issues.  Your property values were low enough that there were no excess assets.   Your case was discharged and closed by May 1, 2009.    You breathe a sigh of relief and prepare to move on in your life.   Then, you receive notice that Uncle Fred has died, on May 10, 2009 and you are named in his will, which was made prior to January 1, 2009.   May 10th is within 180 days.   Uncle Fred left you $10,000.00 and your state does not provide for that much cash or have a “wildcard” exemption.  If you had filed bankruptcy with 10,000 in cash, the trustee would have taken it and now, the trustee will take that money to pay the creditors of your bankruptcy estate.

Example Two:   The same facts as above, you are not named in Uncle Fred’s will.    Rather, there is a pay on death provision from when he started his checking account, which has $10,000.00 in the account.   Depending on how your state law has interpreted payable on death provisions, that money is most likely NOT property of the estate (it is not inheritance, bequest or devise, but rather a contract).

What’s the moral of this story?   If you inherit money through a will, you  must turn over the money if the death happens before bankruptcy or within 180 days of filing bankruptcy.   If your uncle doesn’t leave a will but has a payable on death provision on his bank account, you get to keep the money (probably).  Either way, you must tell the trustee about the money so that the trustee is satisfied that the money is not part of the estate.

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I'm a consumer protection lawyer in Oregon, working with people in Klamath; Lake; Jackson; Josephine; Curry; and Deschutes County. I speak regularly on bankruptcy and consumer protection issues nationwide.

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