If you receive an inheritance while in Chapter 13 bankruptcy you may be required to amend your repayment plan and increase what you pay to unsecured creditors. Read on to learn more about how your inheritance can affect your Chapter 13 bankruptcy.
Property of the Estate in Chapter 13 Bankruptcy
Similar to Chapter 7 bankruptcy, most of your property becomes part of the bankruptcy estate when you file for Chapter 13 bankruptcy. In fact, many types of property you acquire during your Chapter 13 case (which can last from three to five years) is considered property of the bankruptcy estate. This means that if you receive an inheritance during Chapter 13 bankruptcy, it will usually be part of your bankruptcy estate.
Will You Lose Your Inheritance in Chapter 13 Bankruptcy?
Luckily, unlike in Chapter 7 bankruptcy, the Chapter 13 trustee does not liquidate your property and distribute it to your creditors. In Chapter 13 bankruptcy, you get to keep all your property. In return, you pay a certain portion of your debts back through a repayment plan. However, if you receive a significant inheritance, the trustee will want you to pay more to your unsecured creditors. As a result, this can greatly increase your monthly plan payment amount.
(To learn more about Chapter 13 and the repayment plan, see Chapter 13 Bankruptcy.)
How Does Your Inheritance Affect Your Repayment Plan?
As we discussed, receiving an inheritance during Chapter 13 bankruptcy can increase what you have to pay into your repayment plan. However, how much you may be required to pay also depends on when your inheritance was received. Keep in mind that an inheritance is considered received when you become entitled to it (usually when the decedent passes away), not when you actually collect it.
Inheritance Received Within 180 Days of Filing for Chapter 13 Bankruptcy
If you were in a Chapter 7 bankruptcy, any inheritance you received within 180 days of your filing date would have been property of the bankruptcy estate. The Chapter 7 trustee would have taken it and distributed any nonexempt portion among your unsecured creditors. Since you get to keep all of your assets in Chapter 13 bankruptcy, you must pay unsecured creditors at least as much as they would have received in a Chapter 7. This is referred to as the “best interests” test. (To learn more, see Unsecured Debt in Chapter 13: How Much Must You Pay?)
This means that if your inheritance was received within 180 days of filing your case, the trustee will require you to pay unsecured creditors at least an amount equal to the nonexempt portion of your inheritance. The trustee will argue this is fair because your creditors would have been entitled to that amount if this was a Chapter 7 case.
Example. Let’s assume you filed for Chapter 13 bankruptcy on January 1, 2011. Subsequently, your aunt died and left you $50,000 on March 1, 2011. If you are not able to exempt any of your inheritance, the trustee will require you to pay at least $50,000 to your unsecured creditors through your plan. If you have less than $50,000 of unsecured debt, the trustee will ask that you pay all unsecured creditors in full.
Inheritance Received After 180 Days of Filing for Chapter 13 Bankruptcy
Even if your inheritance is received more than 180 days after filing your Chapter 13 case, the bankrutpcy trustee may argue that you should pay the inheritance amount into your Chapter 13 plan. Not all courts have ruled on this issue. For those that have, most have required the Chapter 13 debtor to pay the inheritance amount into the plan, often reasoning that the inheritance is a windfall and should be part of your bankruptcy estate. A few courts have ruled otherwise, and allowed Chapter 13 debtors to keep inheritances they've received after the 180-day period has passed.