How Bankruptcy is Affected by Inheritance - Herrin Law
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How Bankruptcy is Affected by Inheritance

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How Bankruptcy is Affected by Inheritance

When you file bankruptcy, you are required to disclose all of your assets. This includes any inheritance you may receive (even if you have not received it). The most important fact regarding an inheritance is when the person passed away.  If you receive the inheritance before filing, then you should discuss with your attorney on whether to proceed with filing. In most situations, the inheritance will be non-exempt, which  means you won’t be able to protect the assets and may have to turn it over to the bankruptcy trustee. 

The most common situation is when a person receives an inheritance after they file for bankruptcy. 

In A Chapter 7 Bankruptcy

If you filed a chapter 7 bankruptcy there is a windfall rule that you must be aware of. The windfall rule states that if you receive any sort of windfall (an inheritance will fall under that) within 6 months from the date you filed your case, you must report that to the Trustee. The rule requires you to report the information to the Trustee even if you have not received any money. 

Example:  Your mother passes away 4 months after you file your chapter 7. Her estate is finally probated and you receive a check for $25,000 1 year after your bankruptcy case was filed. In this scenario, you would be required to notify the Trustee and he/she may be able to take the $25,000 if you are unable to exempt it. 

Example 2:  Your mother passes away 7 months after you file your chapter 7. In this case, the inheritance arose after the windfall period (6 months), so the Trustee would have no rights or access to your inheritance.

In a Chapter 13 Bankruptcy

When you file a chapter 13 bankruptcy, the windfall rule changes. In a Chapter 13 you may be in bankruptcy for 3 to 5 years. You are required to report any windfalls during the entire duration. So if you received an inheritance 1 year after you filed your Chapter 13 bankruptcy, then you would have to report that to the Trustee. The Trustee would be able to use your inheritance to pay off your case and pay your unsecured creditors

If you want to discuss your financial situation in more detail you can call 469-607-8552 and set up your free financial strategy session (30 minutes).  Also, if you decide to hire my law firm and mention this blog, you will receive a 10% discount on your fees.