What Happens in Minnesota if I Inherit Something After Filing Bankruptcy?
It’s a fair question.
No one plans when they will receive an inheritance, or when they will need to file for bankruptcy.
This makes the possibility that you may inherit from an estate after filing bankruptcy a very real one.
- What happens to that inheritance?
- Will you be able to keep it?
- Will it go into your bankruptcy?
- How much?
What do you need to know about inheritance and bankruptcy?
When you inherit something after filing bankruptcy, two factors that come into play:
- The type of bankruptcy you filed
The general rule of inheriting after bankruptcy is that:
- You need to report it to your bankruptcy trustee if it is within 180 days of filing Chapter 7 bankruptcy
This rule is to prevent people from filing bankruptcy just before a rich relative died, to avoid having the inheritance go to pay off the debt.
However, if you are filing for Chapter 13 bankruptcy:
- Inheriting up to five years after filing could affect your repayment plan
In Chapter 13, you must pay your income to creditors for 3-5 years, and an inheritance is income.
Usually the Chapter 13 trustee will allow you to keep some of the inheritance, but you should be prepared to pay some of it into the Chapter 13 plan.
What Happens to Your Inheritance After Bankruptcy?
- If the person dies within 180 days after you filed bankruptcy, you need to disclose any inheritance you receive to your bankruptcy trustee
- The 180 days counts to the day the person dies, not to the day that you receive the money or property from the inheritance
Your Minnesota bankruptcy lawyer will steer you towards what you need to amend specifically for what you inherited.
Can inheritance be protected in bankruptcy?
- Very often, the bankruptcy schedules can be amended to exempt or protect an inheritance
Here’s what you need to know.
- If you inherited a piece of property, you will need to amend your Schedule A form
- If you live in the house, or there is less than $10,000 in equity you will likely be able to keep it
Money and Personal Property
- If you inherited money or other personal objects, you will need to amend your Schedule B form
- Usually a few thousand dollars of inheritance is protected in Chapter 7 Bankruptcy
- If you inherited anything that is considered exempt from bankruptcy, you will need to amend your Schedule C form
- Furthermore, you will need to classify it and then amend either Schedule A or Schedule B forms
- Your lawyer will know what is exempt and make sure that you get to keep it
What if you inherit something in Chapter 13 Bankruptcy?
- If you filed for Chapter 13 Bankruptcy, your inheritance isn’t exempt, and it can have a decent affect on your repayment plan
As Chapter 13 Bankruptcy works on a repayment plan, you pay a certain amount per month that is split between your creditors.
Here’s what you need to know:
- If you are to inherit, then you will likely have to pay some of the inheritance into the chapter 13 as a one-time extra payment
- It doesn’t matter when you are to receive the inheritance, even if you won’t get it until years down the line
- The only date that matters is when the deceased passed away
On that day, you became entitled to assets that can affect your bankruptcy.
Are there Inheritance Exemptions From Bankruptcy
While there are federal exemptions, each state will also have their own set of bankruptcy exemptions as well.
If you have inherited assets, your bankruptcy lawyer will be able to concisely state whether that property falls under Minnesota’s state bankruptcy exemptions.
Unfortunately, exemptions are all capped at a certain amount.
- You inherited $3,000 in what would be exempt assets, but the state cap is a $1,000 value
- It may be deemed that you need to sell the asset and will lose the unsecured portion
So, you would still retain the $1,000 value, but you would lose the other $2,000 that came after liquidating it to your creditors.
Can you protect your inheritance?
- Unfortunately, the only way to protect your inheritance other than to take advantage of the exemptions is to work with your loved ones
If you are foreseeing bankruptcy in the future, you can protect inherited assets by convincing your loved one to change their will or create a trust that doesn’t distribute the inheritance.
It is best to do this before bankruptcy, especially if you have a wealthy relative who is in bad health.
The trust will protect these assets not just from the probate process after death, but from any claim that bankruptcy may have on them as well.
While most neither plan for bankruptcy nor an unexpected passing, both can happen, and occasionally they happen at the same time.
If you have inherited any assets after filing bankruptcy in Minnesota, it is best to check in with your bankruptcy lawyer to see if and what will need to be reported.