What Happens If I Inherit Something While I am In Bankruptcy?
Whether or not you get to keep the inheritance depends on when you filed bankruptcy, what chapter of bankruptcy you filed, and what you inherited. Usually it is possible to keep some, but not all of an inheritance. A good bankruptcy lawyer will always ask if you are likely to get an inheritance soon, and make sure that you get to keep as much of it as possible.
WHEN DOES AN INHERITANCE GO INTO A BANKRUPTCY?
If someone dies within 180 days of when you filed chapter 7, then anything you inherit from that person goes into the bankruptcy. However, you can often protect some or all of the inherited property from being sold to pay creditors by amending your bankruptcy petition to claim the inherited property as exempt.
Andrew Walker recently litigated a case where he was able to save a house that a woman inherited when her father died shortly after she filed bankruptcy. This case is called In Re Walz. It is now Minnesota precedent saying that you can protect an inherited house in chapter 7 bankruptcy if you are living in the house at the time you inherit it. In most cases you get to keep the first few thousand dollars of an inheritance, but the rest goes to pay creditors.
If you get an inheritance more than 180 days after filing chapter 7, then the inheritance does not go to your creditors and you get to keep all of it.
If the inheritance is more than enough to pay back all of the creditors, then the bankruptcy court will only take what is necessary to pay back the creditors and truestee’s fees, and you will get the rest.
HOW DOES AN INHERITANCE WORK IN CHAPTER 13?
Chapter 13 is different because in chapter 13, you must pay any extra income or windfalls into the chapter 13 until the chapter 13 is over or all of your debts have been paid off. An inheritance is extra income, so if you are in chapter 13, you must pay it into the chapter 13 plan.
Just like with chapter 7, however, if the inheritance is more than enough to pay off the creditors, you get to keep whatever is left over. Unlike chapter 7, however, you may not amend a chapter 13 bankruptcy to protect a portion of the inheritance.
Because chapter 13 goes for three to five years, it is a good idea to speak openly with your family before filing it. If you are likely to inherit something large while the chapter 13 is in process, you should tell your lawyer at the outset.