What Happens if You Receive an Inheritance During a Bankruptcy Proceeding?
The second you file for bankruptcy, you are creating what is referred to as the “bankruptcy estate.” This estate includes everything that you own at the time that you file bankruptcy. This timing is important because, usually, the assets in your bankruptcy estate will determine what type of bankruptcy you can file and how much you can pay your creditors.
Depending on the type of bankruptcy you file, your future income may affect your bankruptcy. Although inheritance is technically not considered income, it can have an effect on your bankruptcy. This effect will vary based on the type of bankruptcy you file.
Inheritance in Chapter 7 Bankruptcies
If you inherit property within 180 days of filing for bankruptcy, you must disclose that asset by amending your bankruptcy forms that you previously filed with the court. Unless the inheritance that you have received is somehow exempt, it will be used to pay scheduled claims of your creditors. The trustee will take the inheritance as soon as you receive it and distribute it to your creditors.
Keep in mind that it does not matter when you actually receive this inheritance, but when you become entitled to it to trigger the 180-day rule. Usually, that means that the date of the decedent’s death is the relevant time in relation to your bankruptcy filing.
The Policy Behind the 180-Day Rule
In a Chapter 7 case, you receive a discharge of your appropriate debts immediately upon filing. In some cases, the entire process can last just a few months. Because the process is relatively quick, it is possible to plan so that your debts become discharged before a sick or elderly relative passes away and leaves you an inheritance.
Congress uses the 180-day rule to avoid situations where debtors will discharge all of their debt in anticipation of a large inheritance. This type of planning is unfair to creditors and unethical.
Inheritance in Chapter 13 Bankruptcies
If you have filed for Chapter 13 bankruptcy, your regular income is considered a vital part of your ongoing payment plan for your creditors. If you receive an inheritance during your repayment plan, the court may take it into account to increase your monthly plan payments. This is because the inheritance is considered income that could go to creditor obligations.
The requirement to include inheritance income in your repayment plan in a Chapter 13 bankruptcy will exist even if you receive the inheritance more than 180 days after you filed for bankruptcy.
Proper planning can help you avoid any potential issues with inheritance. Contact us for more information about appropriate bankruptcy planning.