A bankruptcy filing will have you sifting through every asset and bank account you have, making sure every figure you report is correct. But what happens if you suddenly inherit money or property during the bankruptcy process?
Your financial situation can change dramatically, but will you get to keep this gift? The answer will depend on the timing of the inheritance and what type of bankruptcy you’ve filed for.
The Timing of an Inheritance During Bankruptcy
If the unfortunate death of a friend or loved one suddenly leaves you with unexpected resources, that gift can greatly affect the bankruptcy process. After all, the bankruptcy court will consider any property you have as potential capital to pay off your debtors. Even if that money comes through unfortunate circumstances.
When an inheritance is awarded before you’ve filed, bankruptcy paperwork should be amended as soon as possible to reflect the changes in your available assets. Any gift you received from someone’s estate will be part of a bankruptcy trustee’s assessment when he or she decides how to distribute your assets among your creditors.
The 180 Day Rule of Inheritance
Once you’ve filed for Chapter 7 or Chapter 13 bankruptcy, the 180-Day Inheritance Rule will decide what you get to keep and what you don’t. This guideline is used by bankruptcy courts when things like an inheritance or a life insurance award must get factored in.
The bottom line on this rule is that any inheritance you become entitled to within 180 days of your filing date must be reported to the bankruptcy court. The additional income is added to your bankruptcy paperwork.
This amendment to your assets is required even if your bankruptcy has already been resolved. The 180-day time limit generally starts on the day the person giving you the inheritance dies. It’s when you become eligible for the award, not when you actually take possession of the gift.
With this new information, a bankruptcy court would determine how much of the inheritance will get divided among your creditors. Unfortunately, a court can rule to take every bit of an inheritance from you.
Inheritances and Chapter 7
Within those 180 days, your inheritance is fair game to a bankruptcy trustee unless you have sufficient Chapter 7 bankruptcy exemptions remaining to protect it.
The temptation to keep news of an inheritance to yourself may enter your mind, but that would constitute fraud and result in criminal charges. You should always report an inheritance to your bankruptcy attorney as soon as possible so that the bankruptcy court is alerted to the change in your financial status.
Inheritances and Chapter 13
Chapter 13 bankruptcy is settled with a three to a five-year payment plan that permits filers to keep their assets as long as they pay off a portion of their debt. Any award you receive within the 180 days is often used as a justification to raise the number of your monthly payments to creditors.
With Chapter 13 bankruptcy, an inheritance you become eligible for after the 180 days might still end up in the hands of your creditors. If you are still making payments under a Chapter 13 agreement, a bankruptcy court could target any inheritance you receive over that three-to-five-year period. Different bankruptcy courts have ruled differently in these situations, so it’s important to check with a local bankruptcy attorney about the requirements in your region.
Bankruptcy and Inheritance in Marriage
When your spouse brings an inheritance into a marriage, that money is generally considered his or hers and not part of the joined finances of a marriage. It could be retained by a spouse not involved in the bankruptcy. However, once that money is used for joint purchases, those purchases can end up eligible for liquidation to help pay off your debt.
An inheritance received while married can also be left vulnerable to creditors if you file for bankruptcy relief. California is a community property state (as opposed to a common-law state). This means spouses jointly own most property obtained during a union. This holds true even when only one spouse’s name is on a title or account. Many of the assets, including recent inheritances, couples share are vulnerable to bankruptcy.
Trusting Your Bankruptcy Filing to a Bankruptcy Lawyer
Issues of a new inheritance, a life insurance payout, and even recent lottery winnings can affect the terms of a bankruptcy months after it’s been settled.
You won’t know every rule applying to your situation, but it’s very important to speak with a bankruptcy expert to make sure you’re obeying every law after you’ve received an unexpected gift. The failure to report new assets, even unintentionally, can result in a fraud conviction, substantial fines, and even jail time. Talk to a bankruptcy attorney about your circumstances and inform him or her immediately when things change.
Contact a Bankruptcy Attorney Serving Los Angeles and Southern California
Bankruptcy filings already involve complicated paperwork and strict deadlines. When you receive unexpected income, as through inheritance, the degree of difficulty can rise dramatically. That money will likely result in major amendments to your filing.
For help sorting out all of the possible changes and determining what you may be able to keep, please contact us today. The attorneys with the Law Offices of Steers & Associates stand by their clients throughout the bankruptcy process. This commitment is especially helpful when a change in circumstances results in the need to send updated information to the bankruptcy court weeks or months down the road.
Elena Steers is a recognized expert in bankruptcy law and debt negotiation in California and has helped people from all walks of life navigate the confusing bankruptcy process. She makes sure her clients are prepared for each step of the bankruptcy journey even when a client’s situation changes during the process. Take a moment and read about her extensive bankruptcy experience.
Elena Steers is a highly experienced bankruptcy attorney, the founder of Law Offices of Steers & Associates, and previously worked as a Bankruptcy Trustee Assistant at the Office of the Chapter 13 Trustee in Los Angeles. Her current affiliations include the State Bar of California, National Association of Consumer Bankruptcy Attorneys, and Central District Consumer Bankruptcy Attorneys Association.