Bankruptcy and Your Inheritance

By Brenner Spiller & Archer | February 7, 2018

When you file for bankruptcy, you either don’t have to repay your debts (Chapter 7 bankruptcy) or some of your property and income will be used to repay your debts (Chapter 13 bankruptcy).

But what happens when someone passes away and leaves you an inheritance after you file for bankruptcy? Here’s an overview of what happens and how you should handle it.

180-Day Rule

To discourage those who want to file early in anticipation of receiving an inheritance, there’s a law determining what happens before or after 180 days of receiving an inheritance (beginning the day that person passes away, not when you receive the literal inheritance). Either way, you must disclose to your trustee that you received an inheritance.

Before 180 days from death

If the deceased dies before the 180-day mark after you file for bankruptcy, the property and funds you receive may go toward paying back your creditors. In fact, if your inheritance is large, your monthly payments may increase.

After 180 days from death

If the deceased dies after the 180-day mark after you file for bankruptcy, you can keep the inheritance if you filed for Chapter 7 bankruptcy, or some of the property and funds may go toward repaying your debts if you filed for Chapter 13 bankruptcy (depending on a judge’s decision).

It’s important to know that there are certain types of property and funds that are do not go toward repaying your debts depending on your state’s exemption laws and federal exemption laws.

Trusts

If you have time before your inheritor passes away, you can request that your inheritance (including cash, homes, and personal property) be left to you in a certain type of trust instead of in a will to be exempt from claims.

Your Spouse’s Inheritance

Many don’t know that one person in a marriage can file for bankruptcy while the other doesn’t have to. If you decide to file separately from your spouse, their inheritance will initially not be included in your bankruptcy payments. However, if that spouse buys something like a boat that both of you use, that may then be included in your bankruptcy estate and payments.

Have more questions about bankruptcy and your inheritance? Give us a call and we’ll help you through the process.