Inheritances and Bankruptcy

Do you have to file bankruptcy and you are worried about an Inheritance and how it will impact the bankruptcy?

You should be concerned.  Before you file the bankruptcy, if someone has already died leaving you something, your interest in the inheritance, life insurance, or trust is something that you need to discuss with your attorney.

Inheritances are treated differently depending on whether or not you are in a Chapter 7 or a Chapter 13 bankruptcy.

Chapter 7:

In a Chapter 7 bankruptcy if a person dies that leaves you something before you file – your interest in that estate becomes part of your bankruptcy estate even if you haven’t received it yet.  So it doesn’t matter if the probate is still pending, or that you didn’t even know you were entitled to an inheritance, it belongs to you and must be disclosed as soon as you are aware of it.

180 Day Rule:

Normally if you become entitled to property or money after you file a bankruptcy that money or property belongs to you and not the bankruptcy estate.  However, with inheritances this rule is modified.  If you become entitled to an inheritance, that is someone dies, within 180 days after your file your bankruptcy that inheritance becomes part of the bankruptcy estate.

Chapter 13:

In a Chapter 13, all the rules for Chapter 7 bankruptcies apply.  Additionally, since a Chapter 13 remains open for 3 to 5 years, any inheritances between 180 days and the end of the plan can create issues as well.  For example, if you have a parent die two (2) years into a Chapter 13 bankruptcy those funds or properties you might receive can be considered “income” for purposes of determining if you are contributing all disposable income into your plan.  As with Chapter 7s, you want to make sure you bring any inheritances you might be entitled to, to the attention of your bankruptcy attorney.

Inheritance Planning:

There are some things you can do and some things you should not do if faced with an inheritance.

If you are in a bankruptcy or have to file a bankruptcy, DO NOT decline the inheritance in favor of someone else.  You would then not be entitled to protect any of the inheritance and the person receiving it would have to give it up to the Bankruptcy Trustee.

If you know before hand that you might be receiving an inheritance before the person dies, you should talk with them to ensure that the inheritance and life insurance is paid into a Spendthrift Trust.  A Spendthrift Trust protects the inheritance from creditors and the bankruptcy court process.

IRAs / 401ks:

There is good news.  Even if an inheritance issue is triggered in your bankruptcy, if you are a beneficiary under an IRA or a 401k, those funds may be entirely protected from the bankruptcy court and your creditors.  DO NOT allow the funds to disburse to you directly if you are a beneficiary – rather, have those funds rollover into your IRA.  Talk to an experienced bankruptcy attorney right away before doing anything.

Call us to find out if Bankruptcy laws can help.  Many people are embarrassed, feel like a failure, or are simply afraid.  Don’t be.  Bankruptcy laws were created to give you a chance to simply tell your creditors to slow down and stop harassing you while you, your attorney and the Bankruptcy Court figure out a solution.

At the Law Office of Mark McClure, we take the time to listen to you and find out what is going on in your life while treating you with dignity and respect.  In these hard times the last thing you need is to feel judged.  You simply need help. We understand.  Bankruptcy laws are laws that protect.  They protect your things, your home, your car, and your pay checks.

Call our office and get some information.  After all, your creditors have attorneys; shouldn’t you?  Call and ask for Mark McClure at 253-631-6484.  We are here and ready to listen and help.

Inheritances and Bankruptcy