What happens if I receive inheritance during bankruptcy?

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Question:

What happens if I receive inheritance during bankruptcy?

Answer:

An inheritance during bankruptcy will be treated according to when it was received and whether a Chapter 7 or a Chapter 13 bankruptcy has been filed.

If a bankruptcy petitioner inherits within 180 days of filing for bankruptcy, the petitioner must disclose the asset(s) to the trustee by amending the filing. When the petitioner actually inherits is not relevant; only the date the decedent died is considered in determining the time period.

In a Chapter 7 filing, the inheritance does not receive exemption protection and goes directly to the trustee directly without any exemption protection. Under Chapter 13, the inheritance is calculated into the petitioner's repayment plan that will allot assets to the creditors.

If the inheritance is received after the 180-day period, a Chapter 7 trustee does not have a right to claim the inheritance. Only the petitioner has the discretion to add the inheritance to the bankruptcy estate. However, in a Chapter 13 filing the inheritance is automatically considered part of the bankruptcy estate.

To ensure that an inheritance is not integrated into a bankruptcy estate, a petitioner may ask that a trust be created in lieu of a will. The trust would be a spendthrift trust which protects various types of property from creditors and bankruptcy. Property that can be protected by a spendthrift trust include cash, heirlooms, real property, and personal property.

If you are considering filing for bankruptcy, and if you expect to receive an inheritance, you might consider requesting that a spendthrift trust be created. However, if you do receive an inheritance during your bankruptcy, you are legally obligated to inform the trustee or there may be adverse consequences to you. Talk with a bankruptcy attorney to determine what you need to do in this case.

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