Inheritance and Bankruptcy

You may be concerned about what happens to property you inherit when you either contemplate or have filed bankruptcy. Timing is really important when it comes to whether or not you can keep an inheritance. The date used to determine when you are entitled to your inheritance is usually the date the person who left you the inheritance passed away, not the date you received it.1

According to the Bankruptcy Code, assets a debtor has when he or she filed for bankruptcy becomes property of the bankruptcy estate. 11 U.S.C. § 541. However, sometimes it is difficult to determine whether your inheritance will be a part of the bankruptcy estate because the analysis depends on the timing of the inheritance and the type of bankruptcy you file.

Chapter 7

In Chapter 7 bankruptcy the bankruptcy trustee pays your creditors out of your nonexempt assets, if you have any.2 A common question after filing a Chapter 7 bankruptcy is whether you can keep any property You can keep property that qualifies as exempt after your bankruptcy is done.3

Typically, to determine whether your inheritance belongs to the bankruptcy estate you use the 180-Day Rule. That is, if you receive an inheritance within 180 days (six months) of filing your bankruptcy, it typically belongs to the Bankruptcy Estate unless it qualifies as exempt property.4 11 U.S.C. § 541(a)(2)(5)(A). These funds would be used to pay your creditors. However, in a Chapter 7 bankruptcy case, if you inherit 180 days after filing the Chapter 7 trustee cannot take the inheritance.5

Chapter 13

In a Chapter 13 bankruptcy you repay your debts with a three to five year repayment plan. Similar to a Chapter 7 case, any inheritance you receive within 180 days of filing a Chapter 13 bankruptcy belongs to the bankruptcy estate.6 However, it is difficult to discern what happens after 180 days in a Chapter 13 bankruptcy case. In a Chapter 13 bankruptcy, if you inherit property after 180 days it is possible that the judge will take the inheritance into consideration if a creditor or the trustee requests an amendment to your repayment plan.7

The Bankruptcy Code § 1306 defines what property belongs to the estate, and it includes inheritance property specified in § 541 that you acquire after you commence a case but before the case is dismissed or converted. However, § 541 states that an inheritance you receive within 180 days is property of the estate.8 Therefore, it is important that you consult an experienced Arizona bankruptcy lawyer to see how your inheritance will be affected by a Chapter 13 bankruptcy.

[1] Baran Bulkat, Inheritances of Chapter 7 Bankruptcy, nolo.com, http://www.nolo.com/legal-encyclopedia/inheritances-chapter-7-bankruptcy.html (last visited Mar. 10, 2014).

2 Id.

3 Answers to Common Bankruptcy Questions, nclc.org, http://www.nclc.org/images/pdf/older_consumers/bankruptcy_client_brochure.pdf (last visited Mar. 10, 2014).

4 Bulkat, supra note 1.

5 Lisa Guerin, Nolo.com, http://www.thebankruptcysite.org/resources/bankruptcy/bankruptcy-planning/what-happens-if-you-receive-inheritance-during-a-bankr (last visited Mar. 10, 2014).

6 Pernell W. McGuire & Aubrey L. Thomas, Inheritances in a Chapter 13 Case, abiworld.org, http://www.abiworld.org/committees/newsletters/consumer-bankruptcy/vol11num6/inheritance.html (last visited Mar. 11, 2014).

7 Guerin, supra note 5.

8 McGuire et. al., supra note 6.