What To Do If You Receive An Inheritance During Your Bankruptcy Proceedings
When you're struggling with money problems, receiving an inheritance can seem like blessing. Getting money or property after filing a chapter 7 or chapter 13 bankruptcy can complicate the proceedings and result in you losing some or all of your inheritance, though. Here are a few things you can do to protect assets you may receive after a loved one passes away.
The Intersection of Bankruptcy and Inheritance
When you file for bankruptcy, you must provide the court with an accounting of all the cash and assets you have. The trustee for your case will use this information to calculate how much money creditors will receive. For example, if you have $10,000 in usable assets and 20 creditors, each one will receive about $500.
Any additional money or property you obtain during the first 180 days after you file a bankruptcy petition, however, must be reported to the court. The trustee then adds it to your existing assets and recalculates the payment to the creditors. So if you get an additional $10,000, the payment to your creditors would be $1,000 instead of $500.
That's a gross oversimplification of the bankruptcy debt management process of course. The amount of money each creditor receives will depend on a variety of factors including whether the debt is secured or unsecured and the balance due.
Additionally, whether or not you get to keep your inheritance depends on the type of bankruptcy you filed. In a chapter 7 bankruptcy, the trustee may liquidate your inheritance to pay your creditors. In a chapter 13, however, the court will simply raise your monthly payments to account for the increased amount of funds available to you.
Protecting Your Inheritance
It's important to note that the trustee can only lay claim to your inheritance if it comes to you within the first 180 days of filing bankruptcy. If you become a beneficiary on the 181st day or beyond, you'll generally be able to keep those assets, but the trustee may still submit a request that the court require you to pay more to your creditors if you're making payments through the chapter 13 wage-earner plan.
Be aware that the courts look at the date the person passed away and not the date you actually receive the money or property. Even if you don't get your inheritance until years later, you still have to report it to the trustee if the person dies within the 180-day window.
One way to protect your inheritance is to use exemptions. Though they vary from state to state, the bankruptcy court will allow you to keep certain assets (or dollar amount worth) out of the estate. For instance, you can keep up to $20,000 worth of equity in a vehicle in Kansas. If your loved one leaves you a car worth $15,000, then you can use this exemption to preclude it from your chapter 7 bankruptcy in that state.
Another way to protect your inheritance is to have the person place the assets in a revocable living trust. These types of trusts allow heirs to bypass probate court. More importantly, though, many bankruptcy courts have determined that property and money left in these trusts can be excluded from the mandatory asset reporting.
If you're married and your spouse is not part of the bankruptcy proceedings, money and assets left to the person can also be excluded from the estate. As long as your spouse does not use any of the assets for your benefit (e.g. purchase a car for you with money received), then the trustee cannot touch it.
It's important that you work with a bankruptcy attorney who can help you legally protect your inheritance. One wrong move and you could be charged with attempting to hide assets, which can result in your case being dismissed. For more information or assistance with this issue, contact a chapter 7 or chapter 13 bankruptcy lawyer as soon as possible. Click here for more info on bankruptcy lawyers.