An Inheritance During a Bankruptcy

What happens when you receive an inheritance during the bankruptcy proceeding? The answer to the question depends on timing and the type of bankruptcy filed.

If you inherit within 180 days of when you file or within 180 days after you file, you must report the inheritance proceeds to the bankruptcy court trustee who is handling your case. It does not matter whether you will receive anything from the inheritance for months or even years, you must report the possibility to the trustee. The date of death may determine how the trustee will handle the proceeds.

In Chapter 7 Bankruptcy, the inheritance assets will got to the bankruptcy estate, and the bankruptcy court will decide how the assets are to be liquidated. After liquidation, the proceeds will be dispersed to you and your creditors according to the priority order established by bankruptcy law.

In Chapter 13 Bankruptcy, a monetary value will be placed on the inheritance to determine how much you will pay in your reorganization plan. In either case, the addition of the inheritance will be considered when evaluating possible payment to creditors.

If the inheritance is received after the 180 days from when you filed, depending on which type of bankruptcy you filed, the affect will be handled differently. If you have filed Chapter 7 Bankruptcy, once the 180 days is past, you can keep the full amount of the inheritance proceeds and not have to share them with your creditors. The trustee can have no claim to it.

If you have filed Chapter 13 Bankruptcy, the inheritance assets might still be considered property of the bankruptcy estate and change the amount you have to pay to the reorganization plan. The trustee might contend that good faith requires devoting any excess assets obtained to the plan. Depending on which plan is chosen by the court, a three year or five year plan, you will have to report the inheritance until the bankruptcy plan has been discharged.

Why were bankruptcy laws written to include the 180 day provision for the handling of inheritances? To discourage those who anticipate an inheritance from filing bankruptcy when they think death is imminent. Death is not easily predicted outside of six months.

There are suggested solutions for the problem of an inheritance happening during a bankruptcy. Some accountants and lawyers suggest using a “spendthrift” trust to protect heirlooms and the family’s wealth from creditors. Before attempting to protect family wealth, make sure you fully understand the consequences of such actions. If you create a “self-settled trust,” a type of spendthrift trust that allows you to be beneficiary as well as creator, this might be viewed as trying to defraud the creditors. Bankruptcy fraud is a serious crime. State laws also influence which trust you can use to protect your inheritance after filing bankruptcy. One poplular spendthrift trust is the Domestic Asset Protection Trust (DAPT).

The 2005 changes to the Bankruptcy Code created a 10-year limitation period for transfers to self-settled trusts which are meant to hinder, delay or defraud creditors. This means that transfers to DAPTs will be suspect for the 10 years prior to the date that a bankruptcy petition is filed.

Inheritance and bankruptcy laws are complicated. Contact a bankruptcy lawyer if you have received an inheritance and you are considering filing for bankruptcy protection. If you need relief from the stress of debt and you live in or around the metropolitan areas of Albuquerque or Santa Fe, New Mexico, contact us at . We will help you find a bankruptcy attorney in your area who will answer your bankruptcy questions.

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