If you receive an inheritance after filing for bankruptcy, it might become part of your bankruptcy estate. In a Chapter 7 case, this means the trustee can take the inheritance unless it's protected by an exemption. In a Chapter 13 case, receiving an inheritance could increase the amount you have to repay to your creditors.
Whether inherited money or property becomes part of your bankruptcy estate depends on the timing of the inheritance. If you receive the inheritance within 180 days after you filed, the inheritance becomes the property of the bankruptcy estate. You must then notify the court and trustee of the additional asset(s). For more information on how to time your bankruptcy, see our section on Pre-Bankruptcy Planning.
Inheritance Received Within 180 Days of Filing
If you do inherit within 180 days of filing for bankruptcy, you must disclose the asset(s) to the court and trustee by amending your bankruptcy forms. The forms you have to amend depend on what you inherit:
- If you inherit real property, such as land or a house, you must amend Schedule A. If you are claiming the property as exempt, you must also amend Schedule C.
- If you inherit money or personal property, you must amend Schedule B. If you are claiming the property as exempt, you must also amend Schedule C.
It doesn't matter when you are actually due to collect the inheritance, even if it won't be for months or years. The date that matters is the date the decedent passed away. On that day, you became entitled to receive the inheritance.
In a Chapter 7 case, an inheritance received within 180 days after you file for bankruptcy becomes part of your bankruptcy estate, with the rest of your property. If it fits within one of the exemptions available to you (categories of property you are entitled to keep in bankruptcy, as set out in state or federal law), you will be able to keep it. (For more on exemptions, see Bankruptcy Exemptions: What Do I Keep When I File for Bankruptcy?) If not, however, the trustee can take it to distribute to your creditors.
If you file for Chapter 13 bankruptcy, the consequences of receiving an inheritance also depend on whether the property is exempt. You don't have to give up your property in Chapter 13; instead, you make monthly payments to be divided among your creditors, as part of your Chapter 13 repayment plan. How much you have to pay into your plan depends, in part, on your nonexempt property. Your unsecured creditors (those holding debts that aren't backed by collateral) are entitled to be paid at least as much in Chapter 13 as they would have received if you had used Chapter 7: the value of your nonexempt property. So, if you receive an inheritance that isn't exempt, you will have to add its value to what you repay to your unsecured creditors, which will increase your plan payments. (If the property is exempt, it has no effect on your repayment plan.)
Inheritance Received After 180 Days of Filing
If you inherit more than 180 days after you file, the consequences may differ. A Chapter 7 trustee cannot claim the inheritance in this case; it's yours to keep, whether or not the property is exempt. In a Chapter 13 filing, however, the judge may take an inheritance into account, even if more than 180 days have passed since you filed, when deciding on a motion by the trustee or a creditor to require you to amend your plan. (This can happen when your income and assets increase for any reason during the repayment plan period, from three to five years.)
Policy Behind the 180-Day Rule
The 180-day rule is intended as a disincentive to those who might file for bankruptcy early, to protect an anticipated inheritance. Without the time limit, a debtor could file early to avoid the inheritance becoming part of the bankruptcy estate. The 180-day rule makes property received after filing subject to the same exemption rules and protections of all other property, and so discourages preemptive bankruptcy filings.
What If a Non-Filing Spouse Inherits During Bankruptcy?
If the inheritance belongs to your spouse, who didn't file for bankruptcy with you, that money or property is not part of your marital property or part of your bankruptcy estate. However, even if the inheritance is considered your spouse's separate property, commingling it with your assets may cause the inheritance to lose its separate status. For example, if your spouse spends part of the inheritance buying you an expensive sports car, the car may become part of yourbankruptcy estate.
If you're married and considering bankruptcy, see Bankruptcy for Married Couples: Filing Options.
Avoiding the Problem
To ensure that your inheritance won't end up in your bankruptcy estate, you may suggest that you be left the property in a revocable living trust, rather than in a will. Some courts have held that property left via this type of trust is not part of the bankruptcy estate. This property can include cash, family heirlooms, real property, and personal property. Contrary to popular belief, trusts are not vehicles solely for the wealthy and privileged. Anyone can set up a trust and doing so can save an heir the avoidable complications of dealing with a inheritance in the midst of a bankruptcy.
Find an Attorney
If you file for bankruptcy and receive an inheritance, bankruptcy laws require that you disclose the new assets to the court and trustee. If you inherit property that you really want to keep, you may wish to discuss your case with an experienced attorney to determine how your inheritance will be treated during the bankruptcy.