What will happen if I inherit a large sum of money after filing for bankruptcy?

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Question:

What will happen if I inherit a large sum of money after filing for bankruptcy?

Answer:

If you receive an inheritance within 180 days after filing for bankruptcy, you have to report it to the bankruptcy trustee. The consequences of receiving the inheritance depend on several factors, including whether the inheritance is exempt and whether you filed under Chapter 7 or Chapter 13. 

What You Must Report

You have to tell the trustee if you inherit money or property within 180 days after you file for bankruptcy. What you inherit will become part of your bankruptcy estate. The purpose of this rule is to discourage people from trying to game the system by filing for bankruptcy just before they receive an inheritance, so they can shield the inheritance from creditors. 

Consequences in Chapter 7

Although the inheritance becomes part of your bankruptcy estate, this doesn't necessarily mean you will lose it. If you can protect your inheritance with exemptions, the trustee won't take it. For example, if you inherit your parent's home, and your state allows you to exempt all of the equity in your residence, your inheritance is exempt and can't be taken. If the inheritance is nonexempt, however, the trustee can take it, sell it, and distribute the proceeds to your creditors. 

Consequences in Chapter 13

You don't lose any property in Chapter 13, so you will be able to keep your inheritance. If it is not exempt, however, it could significantly increase your payments. In Chapter 13, your unsecured creditors must receive at least as much as they would have gotten if you had used Chapter 7: the value of your nonexempt property. If you inherit nonexempt property, you will have to pay its value into your Chapter 13 plan over the repayment period. 

Updated by: , J.D.

This site does not provide legal advice and users of this site should not interpret any of the information presented here as legal advice. The information provided merely conveys general information related to commonly asked legal questions. We are not a law firm and the employees responding to questions are not acting as your legal attorney. You should ultimately consult with a lawyer for your case.

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