If you inherit something after bankruptcy, then you might be concerned.
The basic rule in Chapter 7 Bankruptcy is that assets or money which a person gets after bankruptcy are not included in the bankruptcy. An Inheritance or Life Insurance Payout is an exception to this rule.
The idea is that it isn’t fair that someone would be released of all of their debts, and then get a big windfall that would be enough to pay back lots of debt.
Inheritance and life insurance work differently in Minnesota in Chapter 7 and Chapter 13 Bankruptcy.
INHERITANCE OR LIFE INSURANCE PAYOUT AFTER CHAPTER 7 BANKRUPTCY
- If someone dies in the 180 days after someone files bankruptcy, and leaves an inheritance or life insurance payout to the person who filed bankruptcy, then the inheritance or life insurance goes into the bankruptcy and some of it gets distributed to creditors.
- Whether the inheritance or life insurance plays into the bankruptcy is determined by when the person dies, not when the check for the inheritance or life insurance arises.
Ok, so what does it mean if the inheritance is “included” in the bankruptcy?
Can I keep some of it anyhow?
Yes, depending on what other assets you have and your relationship with the person who died.
It is best to ask your lawyer to figure out exactly what you could keep, but I will summarize the laws in this article.
- If you are using the federal exemptions (Minnesotans without equity in a house use the federal exemptions), then you can keep whatever remains of the Wild Card exemption, which is usually less than $12,000
- In addition to this, you may keep however much is “reasonably necessary” for the future support of you and your dependents from a life insurance payout IF you were a dependent of the person who died with the life insurance policy
- You may not keep part of an inheritance just because it is necessary for your future support
Are you wondering what an “exemption” is in bankruptcy?
Then read this article about exemptions and what you get to keep if you file bankruptcy.
If you are a Minnesotan who has equity in your house, then you may only keep life insurance proceeds if they are from the death of your spouse or child.
In that case, you get to keep $46,000 plus $11,500 for each dependent that you have.
If you have equity in your house, then you may not keep an inheritance at all if the decedent died within 180 days after your Chapter 7 Bankruptcy.
What does this mean?
- It means that you should take good care of your friends and relatives after bankruptcy
They will be grateful, and you will be sure to keep any future inheritance or life insurance award to help you get a fresh start in life.
INHERITANCE OR LIFE INSURANCE PAYOUT AFTER CHAPTER 13 BANKRUPTCY
Most bankruptcies in Minnesota are filed under Chapter 7.
Walker & Walker Law Offices, PLLC files approximately 85% Chapter 7 Bankruptcies.
Chapter 13 is sometimes called the repayment bankruptcy. The basic concept is that you pay what you can afford for 3 to 5 years, and then whatever hasn’t been paid at the end of that time gets discharged so that you don’t owe it anymore.
Because you must pay in any extra income or windfalls that you receive throughout a Chapter 13, you must also pay in your inheritance.
One of the reasons that most people choose to file Chapter 7 Bankruptcy if they qualify is because it is over sooner. It also doesn’t have the potential to drag in things like an inheritance received a few years after filing, meaning that you won’t have to worry if you inherit something after bankruptcy.
In Chapter 13, an inheritance or life insurance payout is income, and so you must pay it to the creditors.
WHAT IF THE INHERITANCE OR LIFE INSURANCE PAYOUT IS MORE THAN THE DEBT?
- If, in either Chapter 7 bankruptcy or Chapter 13 bankruptcy you receive more than the total amount of your debt, then you need only pay in enough to cover all of the creditors that filed proofs of claim in your bankruptcy, plus a percentage to the bankruptcy trustee for administering everything.
It is common that a few creditors do not file proofs of claim. A proof of claim is a legal document where the creditor has to prove how much money you owe, and show that the debt isn’t a scam. They must attach the contract showing that you owe the money, and a payment history, and there is a deadline.
This is actually a lot of work, and sometimes creditors don’t do it. Maybe they lost the documents, or maybe they don’t want to pay the attorney’s fees for it, but for whatever the reason it is typical that a few creditors will not file proofs of claim.
Creditors that were listed in the petition by your lawyer and who do not file a proof of claim are discharged and get nothing.
- Thus, you can still come out ahead by filing bankruptcy even if you get a large inheritance or life insurance payout
The bankruptcy will still be on your credit report. You cannot have the bankruptcy vacated just because all of the creditors got paid all of the debt.
WHAT TO DO NEXT
If you’ve inherited something after you’ve filed for Chapter 7 Bankruptcy or Chapter 13 Bankruptcy in Minnesota, then why not not speak to us now at 612.824.4357?
We’ll give you all the help and advice you need.
We’re looking forward to helping you.