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What Happens if I Receive an Inheritance after Bankruptcy Filing?

Even If You Didn’t Expect an Inheritance Before Filing, You Can Still Lose it Afterward

inheritance after filing bankruptcy

Inheritance after Bankruptcy: The Expanding Bankruptcy Estate

Generally, when you file a Chapter 7 or Chapter 13 bankruptcy, the value of the assets of the bankruptcy estate that is created by automatic legal function upon the filing of the bankruptcy estate becomes calculated as of that date. Thus, for example, if upon the filing of a Chapter 7 bankruptcy, you owned, say, stocks worth $3,000 as of the date of filing, they need only be exempted (protected) at that $3,000 value, even if the stock value increases after the date of filing.

Some assets can come into the bankruptcy estate after the date of filing, however, and the proceeds from an inheritance are among them.

Post-Filing Inheritance After Bankruptcy: Chapter 7

In a Chapter 7 bankruptcy, assets that are not fully exempted (protected) can be seized and liquidated (sold off) for the benefit of your creditors by the Chapter 7 Trustee assigned to your case to “administer” the assets of your bankruptcy estate.

The question with regarding to inheritance after bankruptcy filing in a Chapter 7 context is: “Do I have to give the inheritance to the Chapter 7 Trustee?”

The answer depends upon 2 things: when you receive the inheritance relative to your bankruptcy filing-date and whether some or all of the value of the inheritance can be fully exempted (protected).

Section 541(a)(5) of the US Bankruptcy Code mandates that, among other assets of the bankruptcy estate are inheritances that you become entitled to receive within 180 days of the filing-date of the bankruptcy. So, if your great-grandmother passes away 3 months after you file the bankruptcy case, and she leaves you $10,000 in her will, you become entitled to receive the inheritance when great-grandmother passes away, well within the 180-day (6-month) timeframe in that example.

The 180-day date does not hinge upon the date you actually receive the funds.

If that is the case, the next consideration is whether you can fully exempt the inheritance proceeds or not.

Assets are protected from seizure and sale by the Chapter 7 Trustee by the application on paper, in your bankruptcy petition, of certain “exemptions” by your bankruptcy attorney. These “exemptions” are pieces of the Bankruptcy Code or your state’s statutes that allow certain types of assets up to certain dollar-value limits to be “exempted,” or removed, from the bankruptcy estate, in full or in part relative to their fair-market value.

If an asset is exempt up to its full fair-market value, it is essentially no longer an asset of the bankruptcy estate at all and no longer subject to Trustee liquidation.

If the $10,000 inheritance from great-grandmother could be fully exempted, it would also not have to be turned over to the Chapter 7 Trustee. If only part of it could be exempted, only the non-exempt portion would need to be turned over. If none of it could be exempted (because all of your exemptions appropriate to this type of asset have been used up protecting other property you may have), all of it would need to be turned over.

This exempting can be done by your bankruptcy lawyer with an amendment of your bankruptcy petition schedules, even after the case has been filed, once the inheritance is discovered.

Inheritance after Bankruptcy: Chapter 13

In a Chapter 13 bankruptcy, no assets are seized and liquidated by the Trustee. This is one of the reasons why many bankruptcy filers opt for a Chapter 13 rather than a Chapter 7 bankruptcy. However, again, if you receive the inheritance within 180 days of filing the case, it will again come into the bankruptcy estate.

What that means in a Chapter 13 context is that either liquid funds received (if it was a cash inheritance) may need to be turned over to the Chapter 13 Trustee depending upon the terms of your own Chapter 13 plan and local rule and practice in your particular bankruptcy court or, if your Chapter 13 plan has not yet been confirmed (approved) by the Bankruptcy Court, the value of the assets inherited, even if they need not be turned over, may have an impact upon the size of your required monthly Chapter 13 plan payment.

Inheritance after Bankruptcy: The Bottom-Line

The bottom-line with regard to an inheritance received after a bankruptcy filing is that: A) you must inform your bankruptcy attorney of the inheritance, and B) you must inform the Trustee, whether a Chapter 7 or a Chapter 13 Trustee, of the inheritance. Your lawyer must have the information necessary to determine whether the inheritance is within the bankruptcy estate or not and, if so, to make the necessary amendments to your schedules to exempt as much of it as possible.

Further some monies you may receive after a bankruptcy filing which happen to originate with the death of someone close to you are not necessarily inheritances at all, but, again, your attorney must have the information necessary to make this determination.

Any failure to inform the Trustee or the court of the inheritance if you do become entitled to it within 180 days of filing will constitute some level of bad faith or bankruptcy fraud, and failure to so inform the necessary parties can endanger your right to a discharge from your debts and your ability to proceed through the remainder of your life without a felony bankruptcy fraud criminal conviction.

If you are a Michigan resident and would like to explore your options for a Chapter 7 or Chapter 13 bankruptcy with an experienced Michigan bankruptcy attorney, please contact us at (866) 674-2317 or click the button below to schedule a free, initial consultation.

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