You may be able to keep an inheritance in bankruptcy or funds from a lawsuit if you know how to exempt it or if you know how to time the filing of your bankruptcy according to the bankruptcy code. Whether you file for Chapter 7 or Chapter 13 bankruptcy also determines whether or not you keep the property. Of course, you start life over by filing exemptions to keep a certain amount of property.
Understanding Bankruptcy and Inheritance
Navigating the complexities of bankruptcy can be challenging, especially when it comes to handling an inheritance. Understanding how bankruptcy and inheritance intersect is crucial for making informed decisions about your financial future. Whether you are dealing with a Chapter 7 or Chapter 13 bankruptcy, knowing the rules and regulations can help you protect your assets and manage your debts effectively.
⎆ What is a Bankruptcy Estate?
A bankruptcy estate is essentially a legal entity that is created when you file for bankruptcy. It encompasses all of your assets, including any inherited money or property, and places them under the control and protection of the bankruptcy court and an appointed bankruptcy trustee. The trustee acts as an administrator, managing the estate and ensuring that the assets are used to pay off your debts as fairly as possible. When you file for bankruptcy, most of your money and assets become part of this estate, making it the temporary legal owner of your property until the bankruptcy case is resolved.
⎆ How Does Bankruptcy Affect Inheritances?
The impact of bankruptcy on inheritances largely depends on the type of bankruptcy you file and the timing of the inheritance. In a Chapter 7 bankruptcy, any inheritance you receive within 180 days of filing becomes part of the bankruptcy estate and may be used to pay off your debts. This means that if you inherit money or property within this period, it could be claimed by the bankruptcy trustee to satisfy creditor claims. On the other hand, in a Chapter 13 bankruptcy, the court may consider your inheritance when deciding on a motion to amend your repayment plan, regardless of when the inheritance was received. This could potentially increase your monthly payments to unsecured creditors. Understanding these nuances is essential for making strategic decisions about your financial situation during bankruptcy.
Ways to Determine if You Can Keep Your Inherited Money in Bankruptcy
Interestingly, exemptions are larger under Kentucky and Federal rules. But, you still have to know how to file bankruptcy and also when to acquire the property. Again, timing is so important! For instance, inheritances acquired within 180 days after filing a petition are property of the estate under 11USC §541(a)(5)(A) in a Chapter 7 case.
Inheritances from death within six months after the discharge should be reported to the trustee and are property of the estate and trustee. Furthermore, inheritances, tax refunds, lottery tickets, and personal injury lawsuits are property the court wants to see, although you may not have the money on the day of filing. However, you must list these assets and exempt them or you will lose them.
⎆ Chapter 7 guidelines for keeping your inheritance.
If you become entitled to receive an inheritance before filing for Chapter 7 bankruptcy, you’ll have to exempt it with a bankruptcy exemption to keep it. Additionally, unlike most other property, a trustee can take an inheritance up to 180 days after you file.
Again, when you file for Chapter 7 bankruptcy, almost all of your assets become part of the bankruptcy. Usually, when filing Chapter 7, you don’t need to worry about the property or funds you acquire afterward.
But, here’s the caveat, there is a special bankruptcy rule that extends the date 180 days for inheritances. Therefore, in order to keep it, you have to exempt it. Also, note that the entitlement date is the date the person passed—not the date you collect the inheritance. Usually, the date you collect the inheritance is months later.
About the 180-Day rule and why it exists within 180 days of filing.
The 180-day rule was for the purpose of stopping people from filing for bankruptcy if they know they’re going to get an inheritance. Otherwise, people file for bankruptcy to protect their inheritance from creditors. The following shows how this rule affects any inheritance. You will note that these rules are based on the entitlement date.
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Before filing for bankruptcy – It’s the same as with any other property in that you must get an exemption to cover it. If you can’t exempt it, it goes to the creditors.
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More than 180 days after your filing date – It is not part of the bankruptcy estate. You can keep it.
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Within 180 days of the bankruptcy filing – The inheritance is part of your bankruptcy estate. You must also amend your bankruptcy paperwork even if your case is closed. However, you can keep it if you can exempt it. Otherwise, it is considered nonexempt property and goes to creditors.
Chapter 13 bankruptcy estate includes everything in §541.
For Chapter 13 cases, the estate includes everything in §541, plus all property acquired by the debtor after filing a Chapter 13 but before Chapter 13 is closed under 1306(a)(1). §1325(b) requires all of a debtor’s “disposable income” to go towards payments. Property acquired during Chapter 13 must be paid to creditors if you are unable to exempt the property, ensuring that all the creditor claims are addressed.
The property also includes other property you acquire such as:
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Lottery winnings – In re Koonce, 54 BR 643 (Bankr DSC 1985)
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Lawsuit settlements, insurance settlements, – In re Nott, 269 BR 250, 257, 258 (Bankr. MD Fla 2000) and In re Euerle, 70 BR 72 (Bankr DNH 1987) and
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Large gifts or loans – Doane v Appalachian Power Co, 19BR 1007 (Bankr WD Va 1982)
Resources for Bankruptcy
Louisville Kentucky Bankruptcy Forms
Managing Inheritances in Bankruptcy
Handling an inheritance during bankruptcy requires careful planning and full compliance with legal requirements. Properly managing these assets can help you avoid complications and ensure that you retain as much of your inheritance as possible.
⎆ Disclosing Inheritance Assets
If you receive an inheritance within 180 days of filing for bankruptcy, it is imperative to disclose this asset to the court and the bankruptcy trustee. This involves amending your bankruptcy forms to include the inherited personal property or real property, such as land or a house, on Schedule A/B and claiming the property as exempt on Schedule C. The critical date to remember is the date the decedent passed away, not the date you are actually due to collect the inheritance. Failing to disclose inherited assets can lead to severe consequences, including the loss of the inheritance or even the dismissal of your bankruptcy case. To navigate this process smoothly, it is crucial to work with an experienced bankruptcy attorney who can guide you through the disclosure requirements and help you protect your assets.
By understanding these aspects of bankruptcy and inheritance, you can better manage your financial situation and make informed decisions that align with your long-term goals.
Other Related Information about the Bankruptcy Trustee
Western Kentucky Chapter 13 Bankruptcy Rules
Real Estate Workouts Avoiding Foreclosure
Bankruptcy Filing Time Limitations
File Bankruptcy on Income Taxes
How to Qualify for Kentucky Medicaid and Still Protect Assets
If you are facing bankruptcy, don’t delay because timing is so important. I am here to help you. So, contact my office right away to start the conversation. Nick C. Thompson, Bankruptcy Lawyer: 502-625-0905. Understanding how state or federal law impacts your bankruptcy case can provide additional insights into managing your inheritance.
