By Ryan C. Wood
Well, first, sorry for your loss. The issues are: 1) when did you become entitled to the inheritance; and 2) what chapter of the Bankruptcy Code did you file under, Chapter 7 or Chapter 13?
If you are having financial trouble and have a sick relative you will inherit money from, it is an issue that needs to be discussed with your bankruptcy lawyer before filing for bankruptcy protection or after you already filed your petition for relief. If the amount of inheritance is very small, in most cases, your bankruptcy lawyer can protect the inheritance from your creditors that are owed money by applying your state’s exemptions to protect the inheritance.
Section 541(a)(5)(A) of the Bankruptcy Code provides: Any interest in property that would have been an interest of the debtor on the date of the filing of the petition, and that the debtor acquires or becomes entitled to acquire within 180 days after such date – by bequest, devise, or inheritance.
So, if your loved one passes away within 180 days, or six months, of the date your bankruptcy petition was filed, the inheritance will become property of the bankruptcy estate and you must notify your attorney and the trustee assigned to your case. If your loved one passes away 181 days from the date the petition is filed you will keep each and every penny inherited. Why 180 days or six months after the case is filed? The idea is to try and prevent people from anticipating the death of a loved one and filing bankruptcy to discharge their debt right before their loved one passes away.
Chapter 7 Bankruptcy and Inheritance
In a Chapter 7 bankruptcy any inheritance is property of the bankruptcy estate if the property was received within 180 days of the date the bankruptcy petition was filed. If you filed a Chapter 7 bankruptcy and then received a significant inheritance, the inheritance will become property of the bankruptcy estate and used to pay the creditors listed in your petition.
Once the Chapter 7 Trustee is notified of the inheritance the trustee will then send out notice to all the creditors listed in your bankruptcy petition that a distribution of funds will be made in the bankruptcy case due to the receipt of the inheritance. Creditors have a limited period of time to file a proof of claim detailing how much the creditor is owed and why the creditor is owed money. Sometimes creditors inflate the amount of money that is actually owed to them to receive a higher payment from the bankruptcy estate. The Chapter 7 Trustee may object to a claims, basically saying your claim is not supported by the documentation you have provided or there is a procedural deficiency with the claim. A creditor may amend the claim to fix the problem, but ultimately the Court may have to hold a hearing regarding the validity of the claim and whether the creditor should be paid. Once the Chapter 7 Trustee collects their fee for administering the bankruptcy estate and all of the creditors have been paid in full, if there is any of the inheritance left, you will receive it.
Chapter 13 Bankruptcy and Inheritance
In a Chapter 13 bankruptcy any inheritance is property of the bankruptcy estate and the 180 day rule does not apply. The difference in a Chapter 13 bankruptcy case is a Chapter 13 Plan of reorganization is filed to pay creditors back a certain percentage of what they are owed. Generally, if a significant inheritance is received during the Chapter 13 bankruptcy case, then the Chapter 13 Plan payment will increase accordingly. For example, if prior to receiving the inheritance your Chapter 13 Plan required you to pay back 10% of your unsecured debt, after receiving the inheritance your ability to repay your creditors in the Chapter 13 Plan has increased. You may now be required to pay back 50% of your unsecured debt in the Chapter 13 Plan rather than only 10%.