Will You Lose Your Inheritance in Bankruptcy?

It sometimes seems like bankruptcy is divided into two time periods—the first is before your bankruptcy, when your debts, assets, obligations, claims, and everything else is accounted for and dealt with in the bankruptcy.

The second is after your bankruptcy is over. After that, any new debts aren’t included or discharged, and any new money, income, assets or property you receive is safe.

But these rules don’t apply to inheritances. Inheritances are one area where what happens after your bankruptcy can still be affected by your bankruptcy, even if your discharge in a Chapter 7 case has already been entered.

The 180 Day Rule

Bankruptcy has what is known as a “180 day rule” This rule allows a bankruptcy court to treat your inheritance as part of the bankruptcy estate for 180 days after the decedent leaving the inheritance passes away.

You must inherit the money or property 180 days or more after you file for bankruptcy for you to be able to keep the inheritance free from the bankruptcy court. By “inherit,” that doesn’t mean you have to actually have the cash or property. Just being aware that you are owed the inheritance or that it is coming will trigger the rule.

Inheritances After Your Bankruptcy is Over

Because the rule goes by days, unrelated to when you file your bankruptcy or when you get your discharge, you’ll notice that it is possible for your inheritance to be a part of your bankruptcy case even if the bankruptcy case is over.

Let’s imagine you file your Chapter 7 bankruptcy on January 1. You get your discharge from the court on March 1. But on February 1, someone passed away, leaving you with an inheritance that you received on March 30. Even though March 30 is after your discharge was entered, it is within 180 days of the filing of the bankruptcy on January 1. That means that the inheritance could be taken by the bankruptcy court, even though the case was over.

Keeping the Inheritance

Although you can exempt an inheritance if it fits under any existing exemption, there is no exemption for inheritances under Florida or federal bankruptcy law. And since most inheritances tend to be larger, or more valuable pieces of property, this can pose a problem.

Chapter 13 and Inheritances

In Chapter 13, you do get to keep property including an inheritance. However, because the trustee’s job is to maximize recovery to creditors, and creditors cannot receive less in a Chapter 13 than they would in a 7, an inheritance could result in an increased monthly payoff among in your Chapter 13 plan.

Of course, the best route is to delay a bankruptcy if you can do so, and of course, if you are in a position where you anticipate an inheritance could happen in the near future.

Call the West Palm Beach bankruptcy lawyers at Kelley Kaplan & Eller at 561-264-6850 for a consultation if you are having financial problems.

Resource:

uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-13-bankruptcy-basics