People who file bankruptcy do so because they are in dire financial straits and need either a completely fresh start or help reorganizing their financial affairs. To a person who filed bankruptcy, news of an unexpected inheritance may seem a cause for celebration because they will have money to help them make a new start after bankruptcy. However, that inheritance may belong to the bankruptcy estate. People should understand how bankruptcy law treats inheritances.
180-Day Time Limit
As with so many things in life, whether filing bankruptcy affects a person’s inheritance depends on timing. If a person inherits assets within 180 days of filing the bankruptcy petition, bankruptcy laws include those assets in the bankruptcy estate. The time begins running from when the grantor passed away. Even if a person will not receive the inheritance within 180 days of filing the bankruptcy petition, the inheritance still belongs to the bankruptcy estate whenever the debtor does get it.
The 180 day limit is supposed to prevent people from filing bankruptcy to protect an anticipated inheritance from creditors. Those drafting bankruptcy laws reasoned that, in general, it is not possible to anticipate a person’s death further out than six months, so they set the limit for including inheritances in bankruptcy accordingly.
Chapter 7 vs. Chapter 13 Bankruptcy
How a bankruptcy filing affects an inheritance also depends on the type of bankruptcy a person files. If a person files Chapter 7 “liquidation bankruptcy” and receives an inheritance within 180 days of filing the petition, the trustee will use the assets to pay creditors. If a person filing Chapter 7 receives the inheritance after 180 days have passed, the trustee has no claim to the inheritance.
If a person files Chapter 13 “wage-earner bankruptcy” and gets an inheritance within 180 days of filing the petition, the trustee will include that inheritance amount when calculating how much the person can pay under the repayment plan. If a person gets an inheritance after the 180 day time limit having filed Chapter 13, the trustee may still argue that good faith requires the debtor to allocate more funds to the repayment plan and make the inheritance part of the bankruptcy estate.
Consult an Attorney
Bankruptcy laws can be complex, and there are many factors that people need to consider when filing bankruptcy. If you are struggling financially, talk to an experienced bankruptcy lawyer who can discuss your situation with you and advise you of your options.