An Inheritance and Its Effect on Bankruptcy Filing

Whether you file a Chapter 7 bankruptcy or a Chapter 13 bankruptcy, an inheritance must be listed as an asset with the bankruptcy court if the inheritance occurs within 180 days of your filing date. All inheritances occurring within that time frame becomes a part of the bankruptcy estate. Therefore, an inheritance can have a big effect on a bankruptcy filing.

Different Effects of an Inheritance on Bankruptcy Filing

Here are some different effects an inheritance can have on a bankruptcy filing:

  • Timing of the inheritance within the 180 day time frame can determine how the inheritance will effect a bankruptcy filing. The inheritance can force you from a no-asset Chapter 7 bankruptcy case into an asset bankruptcy case. Depending on how the inheritance is distributed and if the inheritance is large enough, the assets gained can force you from a Chapter 7 case into a Chapter 13 case.

  • Inheritance may be an exempt or non-exempt asset. Depending on what your state exemption laws are and how the inheritance is distributed, the effect of the inheritance may not effect your bankruptcy filing at all. You will still report the inheritance income on the bankruptcy forms, but you may list it as an exempt asset if the amount qualifies in your state.

  • In a Chapter 13 bankruptcy, an inheritance only alters the amount of your payment plan to reflect the asset gained. In other words, your creditors have a right to receive their fair share of the inheritance based on the rules of the bankruptcy and what you now owe them. The creditors in a Chapter 13 bankruptcy are entitled to receive what they would have received in a Chapter 7 bankruptcy.

Determining When to List an Inheritance in a Bankruptcy Filing

If a death has occurred before or within the 180 time frame of the bankruptcy rule and you know you are going to receive an inheritance within that time frame, you are required by bankruptcy law to report it in a bankruptcy filing. What you are not required to report is speculations about inheritance.

Here a couple of speculative incidences of potential inheritance you are not necessarily required to report in a bankruptcy filing:

  • You have a sick relative that may be dying when you are considering filing for bankruptcy protection. Even if a doctor doesn’t give your relative much hope of living through the 180 day waiting period, too many things can happen to change the situation, and until death occurs, they are mostly speculative.

  • You think you are in the will of a deceased relative but are not sure. Until you know for certain you are in a will and/or it has been executed so that you have been made aware of your inheritance, you are not required to speculate on what you do not know for sure.

If a death occurs anytime after the 180 days and you are entitled to an inheritance, the bankruptcy court cannot use the money from the inheritance to pay creditors. If the a death occurs during or before the time frame, the bankruptcy court can come after the inherited asset to satisfy creditors any time the will is executed as long as the bankruptcy has not been formerly closed. When in doubt about reporting potential inheritance, consult with your bankruptcy attorney.

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