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Inheritance and Bankruptcy

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Inheritance and Bankruptcy

Bankruptcy is a dark time during one’s life, and the passing of a loved one can make it even darker. If your loved one left you an inheritance, you may feel immense gratitude amid your grief — a light in your dark world. Unfortunately, there are rules to follow when it comes to inheritance and bankruptcy, so it’s important not to become blinded by that light.

The lawyers at Sawin & Shea have experience at understanding the light in the dark, particularly when it comes to receiving an inheritance amidst a Chapter 7 bankruptcy or a Chapter 13 bankruptcy. Each type of bankruptcy has a different approach to inheritances, and it’s vital to understand these distinctions if you are navigating the inheritance-bankruptcy terrain.

What Is the Chapter 7 Approach to Inheritance?

You just filed your Chapter 7 bankruptcy a month ago, and now you receive word that your aunt has passed away, leaving you an inheritance. What should you do? The first step is to contact your bankruptcy attorney and disclose that you’ve received an inheritance.

During this communication, you will be consoled on your loss and counseled on the proper inheritance-bankruptcy protocol. The magic words in this situation are “180 days.” If you become entitled to an inheritance within 180 days of filing, the inheritance, unfortunately, becomes part of your bankruptcy estate, regardless if you claim it after 180 days.

You could have received property or money from a life insurance policy or death benefit plan. Your appointed trustee and the court consider any form of inheritance an asset that can be liquidated and used to pay your creditors. Any remainder, if any, of your inheritance will go to you after creditors are paid.

If you become entitled to your inheritance after the 180-day timeframe, the trustee cannot claim your inheritance, and your aunt’s gift will go to you.

What Is the Chapter 13 Approach to Inheritance?

Comparable to a Chapter 7 bankruptcy, a Chapter 13 bankruptcy proceeding considers an inheritance part of your bankruptcy estate if you become entitled to it within that same 180-day timeframe. Your trustee will mandate a payment to your creditors that is equal to your inheritance amount.

Different from Chapter 7, if you become entitled to the inheritance after 180 days of filing, you may still be required to treat the inheritance as an asset. It all depends on the court. Some courts have ruled that the inheritance is still part of the estate, even after 180 days; others argue it does not apply, leaving you free to inherit the funds. At Sawin & Shea, we understand local court rules and will advise you accordingly should you receive an inheritance after 180 days.

Another difference between Chapter 7 and Chapter 13 is that your property is not liquidated and dispersed to creditors. So, if your inheritance is in the form of property, you can keep your loved one’s gift. It’s important to note, however, that this may increase your monthly payment amount, as most Chapter 13 bankruptcy plans have a 3-5 year repayment plan.

What Happens If I Don’t Report an Inheritance?

While we are forgiving of mistakes, the courts rarely are. If you have not disclosed an inheritance to the court, you could face severe consequences in the form of large fines, case dismissal, or fraud charges.

At Sawin & Shea, we encourage our clients to be open and honest about all debt and assets during a bankruptcy proceeding. We are on your side and will fight for your right to an inheritance, should it meet the right criteria.

How Can Sawin & Shea Help?

Receiving an inheritance during bankruptcy produces both hope and uncertainty, which can create a confusing path forward. With over 75 years of bankruptcy service experience, Sawin & Shea can pave that path for you with bricks of compassion, aptitude, and dependability.

Please do not hesitate to call us today at 317-759-1483 or send an email for a free consultation. We are ready to help.

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