Inheritance in a Chapter 13 Bankruptcy

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Bankruptcy is a process for giving debtors a fresh start while paying their creditors as much as reasonably possible. In a Chapter 13 bankruptcy, a plan is developed under which the debtor will repay creditors over 3- 5 years. At the end of that period, any remaining debts are discharged.

In developing the payment plan, the bankruptcy court will look to the debtor’s income, expenses, and liabilities, to see what he can afford to pay. Unlike a Chapter 7 (liquidation) bankruptcy, which happens in fairly short order, a Chapter 13 bankruptcy unfolds over years. The plan is therefore subject to modification if the debtor’s income changes.

WHAT HAPPENS IF YOU INHERIT WHILE IN CHAPTER 13 BANKRUPTCY?

An inheritance provides additional income to the debtor—even if it’s one-shot income, it’s in that way no different than getting a large bonus or commission at work, selling a business at a profit, or even winning the lottery. The additional income can enable more or larger payments to creditors, so the inheritance will be factored into the plan. As a result, the debtor may be expected to pay more than he would have in the absence of the inheritance.

HOW CHAPTER 7 MIGHT BE BETTER

Chapter 7 is the liquidation bankruptcy. In it, the debtor’s assets (subject to certain exemptions or exempt amounts) are sold or liquidated, and the proceeds are distributed to the creditors to pay them as much as reasonably possible. While it may seem less advantageous to have your inheritance liquidated than to simply have it factored into calculating what you can pay, in a Chapter 7 bankruptcy, only inheritances which someone comes into within 180 days of filing (i.e. only when the person leaving you money passes away within 180 days of your filing bankruptcy) are included in the bankruptcy estate, liquidated, and distributed. An inheritance after that 180 mark would be yours free and clear—while in Chapter 13, an inheritance which you get at any time while under supervision (3 – 5 years) will be considered in figuring out what you can pay.

HOW AN ATTORNEY COULD HELP YOU

As mentioned above, there’s a hard-and-fast deadline after which your inheritance is not affected by a Chapter 7 bankruptcy. Since under certain circumstances, a Chapter 13 can be converted into a Chapter 7, if you believe that you may inherit at some point in the not-too-distant future, a conversion to Chapter 7 may be in your interest. An attorney can help you determine if this would be the case.

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