It doesn’t happen very often, but sometimes a client who needs to file bankruptcy is also in line to receive an inheritance. Like a lot of things, what will happen to that inheritance in a bankruptcy case depends on the timing.
When you file a bankruptcy case, all your assets form what we call a “bankruptcy estate,” which is similar to a probate estate. It’s a way of describing the class of things that a Chapter 7 trustee can sell (if there are no liens or exemptions), or that a Chapter 13 trustee will count to determine the fairness of your payment plan. This post will deal with the affect of an inheritance in a Chapter 7 case, because your options in Chapter 13 are different, and include simply dismissing your case.
The bankruptcy estate includes only the property that you own or are entitled to at the time your bankruptcy petition is filed, with only a couple of exceptions. One of those exceptions is property you inherit any time up to 180 days after the petition date. The idea is that it’s not fair to let you file bankruptcy while Great Uncle Albert is on his death bed, knowing that you will inherit his fortune. So, your bankruptcy estate will include Uncle Albert’s pile, unless he hangs on for 181 days.
I said that this situation doesn’t happen often, but I have had three clients this year who inherited property while in bankruptcy, or preparing for it. So, let’s look at some examples. First, say that you are planning to file bankruptcy, have prepared all the paperwork and are scheduled to come in and sign your petition, when you find out that your grandfather (who you thought disapproved of you) has left you an annuity. You haven’t yet filed your bankruptcy, so the first thing you should do is call your bankruptcy lawyer. Well, maybe you do a happy dance first, and call your lawyer second. Your bankruptcy lawyer will go over your options, which will depend largely on how much you stand to receive. If the amount that you stand to receive is very large, you may be in a position to pay your creditors, or at least negotiate settlements with them. If the amount is more modest, you may be able to protect and exempt the inheritance, and continue with your bankruptcy plans. The MOST important take-away here is that you need to discuss it with your lawyer. You may be tempted not to mention it, but that is bankruptcy fraud, and your inheritance won’t do you any good at all while you are in a federal penitentiary. And you might think, “how would anyone know,” but such things are public record, and you better believe bankruptcy trustees know how to follow the breadcrumbs.
Let’s change the timing a little bit, and say that you filed bankruptcy about 60 days ago, when you find out that you are one of 36 heirs of property that is going to be sold for a shopping center for $252,000. That works out to about $7000 for you. Again, the most important thing is to talk it over with your attorney. Your attorney will prepare amendments to your bankruptcy schedules and statements for you to sign, which will notify the court and the trustee about the inheritance. In a case I handled earlier this year, the debtor was able to claim most of the inheritance as exempt, leaving about 20% of the inheritance non-exempt. In the end, the trustee decided that the leftover amount was too little to make it practical to administer, so she got to keep the full inheritance. Your results may differ, depending on your exemptions and how hungry your trustee is, but it was a nice result for my client.
I had another client who inherited property shortly after filing bankruptcy, when her husband died. However, the property she inherited from him was his half interest in a house and a car that they owned jointly, and neither of which had any equity. We prepared the amended schedules and statements to go to the court and the trustee, but nothing further happened because the inheritance had no value.
So what if you become entitled to the inheritance after 180 days have passed? Let’s say that Uncle Albert passes away on the 181st day after your petition date. In that case, you have no obligation to notify the court or the trustee, and no obligation to amend your paperwork. You are free to claim your inheritance with no strings attached. Now, it is important to note here that the date that you become entitled to the inheritance is the date the decedent died, even if you don’t find out about the inheritance until later. So, if your relative dies before your bankruptcy or during the 180 days after the petition date, you may have the obligation to supplement your filing and notify the court and the trustee, even if you don’t become aware of the inheritance until later. Whatever the timing, talk to your attorney, who will guide you as to what you need to do, and get you the most benefit possible from your inheritance.
