Inheritance and Chapter 7 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 7 bankruptcy, the debtor’s assets are liquidated and distributed to creditors and the debts are then discharged. While some assets are exempt, at least up to a certain level or value (e.g. the debtor may be able to keep a certain amount of equity in his home, or a car worth up to a certain amount), everything beyond those exempt amounts will be distributed to give creditors the maximum value possible.

Receiving Inheritance During Chapter 7 Bankruptcy

Timing is critical. If you inherit within 180 days (or around 6 months) of filing bankruptcy, the inheritance becomes part of the bankruptcy estate. That means that the inheritance, too, will be distributed for the benefit of creditors—again, subject to any exemptions or exempt amounts.

It does not matter when you would actually receive or have access to the inheritance—which could be months or years later, depending on circumstances. All that matters is when you would become eligible for it, which is when the relative or friend leaving you money or assets passes away. So anything you inherit from a death occurring within 180 days of filing bankruptcy will become part of the bankruptcy estate and could be liquidated and distributed to creditors.

(And, of course, anything you inherited before filing bankruptcy would be part of the bankruptcy estate, too.)

Why 180 Days?

The goal of bankruptcy is the fresh start for deserving debtors—not to aid people in cheating their creditors. The thinking is that if someone knows, or at is at least reasonably certain, that he will inherit shortly—for example, a parent, grandparent, uncle, aunt, etc. is failing, and death is imminent—he should not be allowed to file bankruptcy to discharge debts in advance of receiving his inheritance. Of course, death could happen at any time, and the legal system does not want to deprive people of legitimate inheritances. As a compromise, a 180-day period was selected, as being a long enough time to discourage debtors from filing bankruptcy specifically because they know or strongly believe an inheritance is imminent, and yet short enough so as to not make it impossible for a bankrupt debtor acting in good faith to inherit.

How a Bankruptcy Attorney can Help You

One thing that is critical are the exemptions—an attorney can help you make sure that you are taking advantage of every exemption to the maximum amount.

Also, the two main types of bankruptcy (Chapter 7 and Chapter 13) treat inheritances—and assets and income generally—differently. An attorney can help you decide which form of bankruptcy would be more advantageous.