If you've filed for bankruptcy protection, receiving an unexpected windfall may not be a good thing. Whether you've filed a Chapter 7 or a Chapter 13, your creditors might receive at least some of the money if you come into an inheritance. It depends a great deal on the timing of the inheritance.
Your Bankruptcy Estate
Your bankruptcy estate is everything you own, as well as everything you have a right to own. This is important if you've filed for Chapter 7 protection, because your bankruptcy trustee has legal control over your estate. Unlike with a Chapter 13 proceeding, your trustee will sell or liquidate your assets and use the proceeds to pay your creditors. If you receive an inheritance, it usually belongs to your estate, so your Chapter 7 trustee can use it to pay your debts. However, there are some exceptions.
The magic number that determines whether your inheritance is safe from distribution to creditors is six months, or 180 days. The calculation date is the date of death, not the date you receive the bequest. If the person who left you an inheritance died within the six months before you filed your bankruptcy petition, it's considered part of the estate. Another six months stretches forward from the date you file for bankruptcy as well. If the person dies 179 days after you file your bankruptcy petition, your creditors have a right to your inheritance, even if you don't actually receive it until after the deadline. However, if the decedent dies 181 days -- or more than six months -- after you file your petition, your inheritance is safe. It's yours to keep.
Duty to Report
You have an obligation to report your inheritance to your trustee, whether you've filed for Chapter 7 or Chapter 13. However, this doesn't mean that you must tell your trustee if you're a beneficiary in someone's will. Being named in someone's will doesn't technically give you a legal right to the bequest, because the person who wrote the will can change it at any time.
Making Use of Exemptions
Chapter 7 filers have the right to certain exemptions: certain amounts of property and assets that the trustee cannot liquidate to pay creditors. If your inheritance is less than your state's exemption amount, you can use your exemptions to keep it. You can also elect federal exemptions instead, if they're greater than your state's allowances and if your state allows you to make that choice. Certain assets are safe from liquidation at all, and they don't require that you claim an exemption to keep them. These include money left for you in certain trusts, rather than in a will. For example, if your inheritance is in a spendthrift trust, it's not part of your bankruptcy estate, so you can keep it.
Disclaiming Your Inheritance
Your other option is to disclaim your inheritance, if you don't want it to go to your creditors. This requires filing formal notice with the probate court that you don't want it. If you legally waive your right to it, it's not part of your bankruptcy estate. You can't disclaim your inheritance after you've filed for bankruptcy, but you can do it ahead of time, in anticipation of filing.
Chapter 13 Considerations
Chapter 13 bankruptcies are different. When you file for Chapter 13 protection, you enter into a multi-year plan to pay your creditors at least some of what you own them. Your property isn't at risk of liquidation unless you default on your payments. However, your trustee might calculate your inheritance into your repayment plan. If your inheritance is significant, receiving it could increase your payments, and the six-month time periods before and after filing don't apply.
- The Bricks Law Group: Why Is it Important to Identify Any Possible Inheritances Prior to Bankruptcy?
- Allmand Law: Can Creditors Claim an Inheritance in Bankruptcy
- Wadhwani & Shanfeld: Inheritance During Bankruptcy
- American Bankruptcy Institute: The Special Challenges of High Income Debtors (PDF)
- Moran Law Group: Property of the Bankruptcy Estate
- Law Offices of Jon G. Brooks: Chapter 7 Bankruptcy Exemptions