What Happens If I Inherit Money After Filing for Bankruptcy?

Receiving an inheritance after filing for bankruptcy is strange. You’re navigating the rough waters of financial hardship, and along comes assets—not just an unexpected windfall but one that triggers complicated questions. Can you keep it? Is it automatically taken to repay debts?

These circumstances are incredibly unique, and the answer depends on the type of bankruptcy and the timing of the inheritance. Our team at Whitten & Whitten has assisted countless clients in similar situations. We’re here to shed some insight on what might potentially happen, so you can make informed decisions about how to move forward.

Types of Bankruptcy

There are two types of bankruptcy proceedings individuals typically file for: Chapter 7 and Chapter 13. In a Chapter 7 bankruptcy, or “liquidation bankruptcy,” you sell non-exempt assets to repay creditors. On the other hand, Chapter 13 is a “reorganization bankruptcy” where you pay off debts within a court-ordered payment plan over three to five years. Because each type of bankruptcy pays back creditors differently, they have different rules regarding inherited assets.

Handling an Inheritance in Chapter 7 Bankruptcy

One of the key rules regarding inheritances in Chapter 7 is the 180-day rule. Here’s what you need to know:

The 180-Day Rule

If you become entitled to an inheritance within 180 days of filing Chapter 7 bankruptcy, that inheritance becomes part of your bankruptcy estate. This means the trustee assigned to your case can use it to pay off creditors. Importantly, “entitled” doesn’t mean you must receive the money during this timeframe. The date the individual passed away is what triggers entitlement. However, if you acquire the inheritance after 180 days, it is not considered part of the bankruptcy estate and remains yours to keep.

Applying Exemptions

Just because your inheritance becomes part of the bankruptcy estate doesn’t necessarily mean you’ll lose it. Some or all of it may still be protected under bankruptcy exemptions. For example, if your state has specific exemptions for cash or property, you might be able to shield part of your inheritance from creditors. A skilled bankruptcy attorney can help you navigate these exemptions and protect what’s rightfully yours.

Handling an Inheritance in Chapter 13 Bankruptcy

When inheriting money during Chapter 13 bankruptcy, the rules differ slightly because this form of bankruptcy spans several years. Here’s how it works:

The Long Timeline

Inheritance in Chapter 13 becomes part of the bankruptcy estate regardless of when you become entitled to it. Unlike Chapter 7, the 180-day rule doesn’t apply here. Assets acquired—even years into the repayment plan—can still affect your case.

Impact on Debt Payments

If you receive an inheritance, it may increase the amount you owe to creditors. For example:

• You may need to amend your repayment plan to reflect the inheritance.
• An increase in monthly payments could be required.
• A portion of the inheritance may be surrendered to meet the payment obligations of unsecured creditors.

What Happens If You Try to Hide Your Inheritance?

Bankruptcy law prioritizes full disclosure and honesty. Whether you’ve filed for Chapter 7 or Chapter 13, informing the court and trustee about inherited assets is a requirement, not an option. You may face serious legal consequences if you receive an inheritance and try to hide it. This can include dismissing your case, denial of discharge, or even criminal perjury charges.

Proactive Strategies for Handling Potential Inheritance

If you suspect you’ll receive an inheritance around the time of filing bankruptcy or during your bankruptcy term, planning is vital.

Consider a Trust Structure

Speak with the individual leaving the inheritance about the possibility of creating a special kind of trust in your name. Assets placed into a properly structured trust may not legally become part of your bankruptcy estate. This setup ensures the inheritance is protected and in line with your benefactor’s wishes.

Leverage the 180-Day Rule

For Chapter 7 bankruptcy, if you anticipate receiving an inheritance after 180 days, this can significantly affect your decision. Timing your filing strategically may allow you to retain the inheritance fully. Always consult with a knowledgeable bankruptcy attorney before making such decisions.

Take Control of Your Financial Future

An inheritance can change your financial landscape, but it doesn’t have to derail your bankruptcy process. With strategic planning and legal advice, you can ensure that you comply with the law and make the most of this opportunity.

Contact Whitten & Whitten today to explore your options. Start planning for a stronger financial future with the support of experienced legal professionals.