If you are expecting an inheritance but considering personal bankruptcy, you might be concerned about what will happen. Whether an inheritance gets pulled into an ongoing bankruptcy proceeding depends on the size and form of the inheritance, the type of bankruptcy filed, and the timing of the death of the person leaving the inheritance relative to the filing of the bankruptcy proceeding.
Size and Form of the Inheritance
The word “inheritance” is most often associated with money; however, many estates consist of far more than cash. The nature of the item inherited can determine whether it is pulled into the bankruptcy estate of the recipient. For example, a vacation cabin on the lake that is passed down to multiple family members is going to be treated differently by the bankruptcy court than a few shares of stock willed to an individual.
Type of Bankruptcy
There are two different chapters under which most debtors file for personal bankruptcy: Chapter 7 and Chapter 13. In a Chapter 7 case, the bankruptcy trustee can typically take the inheritance and liquidate it in order to pay off creditors, unless the debtor has an exemption they can use to protect it. In a Chapter 13 case, the debtor is more likely to be able to keep the inheritance, but he or she could see the repayment obligations to creditors increase.
Whether an inheritance is part of the bankruptcy estate, and thus reachable by creditors, depends largely on when the bankruptcy was filed relative to when the person who left the inheritance passed away.
If the person who left the debtor the inheritance died within 180 days of the bankruptcy, the inheritance is part of the bankruptcy estate. There are two important things to note about this rule. First, it is the date of death, not the date that an inheritance is received, that matters. Second, the 180 days count both backward from the date of filing and forward from the date the bankruptcy is closed.
If you are currently going through a bankruptcy without the assistance of an attorney, or you are considering filing a bankruptcy and you have received notice of an inheritance (or even if you think you might be inheriting something in the near future), it is important to seek advice from an experienced bankruptcy attorney.