Inheritance and Bankruptcy: Before and After Filing

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Inheritance and bankruptcy can be a very tricky situation to deal with. An individual who receives an inheritance has an interest in trying to protect as much of that inheritance as possible rather than turn it over to pay off debts. However, there are several factors which will play into whether or not the inheritance is garnished by the trustee. 

Jurisdiction

Bankruptcy laws vary from state to state, the state where the bankruptcy is filed in will be a determining factor on how much of the inheritance the individual is allowed to keep. Some jurisdictions have a 180 day rule. If the inheritance is received within 180 days (prior or after) the bankruptcy, the trustee will be able to take some or all of it. For instance, many jurisdictions will allow a debtor to keep a very small fraction of any inheritance they receive in those 180 days surrounding the bankruptcy; however, some jurisdictions, for instance, California, will allow the debtor to keep the entire sum, if used properly.

Use of Inheritance 

Most people wrongly assume that the longer they wait from the time they receive the inheritance to the time they file, the less likely it will be looked at and trustees will not be able to take it. In fact, if the inheritance was received prior to filing, the trustee is more likely to look at how the money was spent. If the individual has no source of income or is simply using it for necessities the trustee will most likely not take issue with the inheritance. 

Conversely, if the debtor now has assets which they purchased with the inheritance, for instance, a vehicle, house, boat, or any other asset that either has a lasting value or a growing value, the trustee will take these (in accordance with law in that jurisdiction) and repay the creditors.

Type of Inheritance

The type of inheritance will be considered in whether or not it is actually considered part of the bankruptcy estate. If you have been willed the inheritance it becomes part of the bankruptcy estate and can be taken by the trustee, even if it was inherited after the bankruptcy (it must be within the 180 days). However, if you were not named in the will, and receive a monetary inheritance which is payable upon death, this will most likely not be included in the bankruptcy estate, thus it will not be garnished by the trustee. 

Legal Help

It is important to speak with a qualified attorney regarding any specific questions you have regarding your inheritance and bankruptcy. An attorney will be able to aid regarding your circumstances. 

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