Bankruptcy in and of itself is a simple idea. It is the process by which a consumer applies for a discharge of debts due to severe financial strain. The complexity occurs when you realize that those consumers are people who are living their lives. They experience surprises, unplanned events, complications and unforeseen circumstances. One such unplanned event or sad circumstance that can cause a seemingly simple bankruptcy to seem more complex is a death in the family of the bankruptcy petitioner that results in an inheritance shortly after the bankruptcy discharge is received. Petitioners who find themselves in this situation must suddenly consider an additional set of circumstances and how they fit into bankruptcy law.
Petitioners who receive an inheritance after filing for Chapter 7 are right to question the safety of their inheritance. The bankruptcy trustee may be able to take it in order to pay creditors. The safety of the inheritance depends on the date the petitioner became entitled to receive the inheritance and whether or not the money received is exempt.
When filing bankruptcy, all of a petitioner’s assets become the property of the bankruptcy estate. If the inheritance is deemed as property of the bankruptcy estate, the bankruptcy trustee can take it along with the other assets to pay creditors listed in the bankruptcy petition unless the entire value of the inheritance can be exempted. In order to determine whether or not the inheritance is a part of the bankruptcy estate, you must determine when you became entitled to receive it. This is usually the date the person leaving you the inheritance passes away. If an inheritance is received within 180 days of the filing of a Chapter 7 bankruptcy, it is part of the bankruptcy estate.
If the inheritance is received within 180 days of filing for Chapter 7 bankruptcy, the bankruptcy schedules need to be modified and the court has to be notified (even if the case is closed). If you exempt the inheritance, you will still be able to keep it, but if you cannot exempt all of the inheritance, the trustee can take the nonexempt portion to pay creditor balances.
If the inheritance is received more than 180 days after the petition for Chapter 7 bankruptcy was filed, it is not considered a part of the bankruptcy estate and the trustee has no claim on the funds. Obviously, the 180-Day Rule was put in place to prohibit people from filing for bankruptcy in preparation of receiving a large inheritance that they wanted to protect from their own creditors.
If you have questions about bankruptcy and inheritance or the 180-Day rule, please contact one of the experienced southern California bankruptcy attorneys at Westgate Law today. We can advise you on your bankruptcy filing.