Inheritance After Closing a Bankruptcy

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A Real Life Question Concerning an Inheritance Windfall

A windfall is a type of gain in income that is unexpected. The key word here is “unexpected.” Bankruptcy law is full of little nuances like these type of key words. All law is full of little nuances for that matter, but what are your legal obligations to report a windfall after a bankruptcy has closed?

A blogger posed this same question in an online bankruptcy forum after stating that he and wife had jointly converted from a Chapter 13 to a Chapter 7. The Chapter 7 was closed in December of 2011. The blogger further stated that his wife’s mother passed away in November of 2011 and that he and his wife knew nothing about any inheritance at the time of death. Since the beginning of the new year, the couple has now learned about a small IRA with $5,000 in it belonging to the wife’s mother, and his wife is the benefactor of the IRA. The filing date for the Chapter 7 conversion was more than 180 days ago. The Chapter 13 was closed when the couple filed to convert to a Chapter 7.

A Windfall and the Effects of Bankruptcy Law

Bankruptcy law is fairly explicit when it comes to different types of potential windfalls that may occur after the fact. Title 11 of the United States Code 541 (a) (5) states that the bankruptcy estate includes “any interest in property that would have been property of the estate if such interest had been an interest of the debtor on the date of filing of the petition, and the the debtor acquires or becomes entitled to acquire within 180 days after such date- (A) by bequest, devise, or inheritance; (B) as a result of a property settlement agreement with the debtor’s spouse, or of an interlocutory or final divorce decree; or (C) as a beneficiary of a life insurance policy or of a death benefit plan.”

Here, the law deals with three different types of potential windfalls – an inheritance, a property settlement, and a life insurance claim. If you receive or expect to receive any of these types of income within 180 days of your filing a bankruptcy, the income is subject to a bankruptcy court trustee’s interest for the bankruptcy estate if the income is not truly a windfall, even after the close of a bankruptcy case.

The Potential Results of a Real Windfall

In the case of the illustration above, the couple’s filing of the Chapter 7 more than 180 days before they learned of the unexpected windfall may likely give them ample grounds for not reporting the income. The Mother-in-law might or might not have died within the 180 days of filing. The information was not provided. Had she died within that time, that would have created a gray area in which the bankruptcy court trustee might challenge an inheritance claim in the interest of the bankruptcy estate.

The couple is required to let the trustee know of any inheritance if it occurs within the time frame of the bankruptcy rules, but in a windfall situation, and that being one that is unexpected, the couple would not be required to inform the trustee if they learned about the windfall outside the 180 day time frame.

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