Inheritances in Chapter 7 Bankruptcy
If you receive an inheritance within 180 days of your Chapter 7 bankruptcy filing, the trustee may be able to take it.
If you receive an inheritance after filing for Chapter 7 bankruptcy, the bankruptcy trustee may be able to take it to pay your creditors. Whether your inheritance is safe or not depends on two things:
- the date you became entitled to receive the inheritance (this determines if the inheritance is part of your bankruptcy estate), and
- whether the money is exempt.
What Is Property of the Bankruptcy Estate?
Almost all of your assets become property of the bankruptcy estate the moment you file for Chapter 7 bankruptcy. The bankruptcy trustee administers the property of the estate by selling your nonexempt assets, if any, and paying your creditors with the proceeds. (To learn more about how Chapter 7 bankruptcy works, see our Chapter 7 Bankruptcy topic area.)
If your inheritance is deemed to be property of the bankruptcy estate, the trustee can take it unless you can exempt its full value. (To learn how exemptions work, see our Bankruptcy Exemptions area.)
Is Your Inheritance Property of the Bankruptcy Estate?
The answer depends on when you became entitled to receive the inheritance. This date is usually the day the person leaving you the inheritance passes away. Not the day you actually collect the inheritance, which can be months later.
The rule is this: Inheritances received within 180 days of your Chapter 7 bankruptcy filing are part of the bankruptcy estate.
Inheritance Received Within 180 Days of Chapter 7 Filing
If you become entitled to receive an inheritance within 180 days of your bankruptcy filing date it becomes part of your bankruptcy estate. This means you have to amend your bankruptcy schedules and notify the court and the trustee even if your case has already been closed. You will be able to keep your inheritance if you can exempt it. However, if you cannot exempt all of your inheritance, the trustee will take the nonexempt portion and use it to pay your creditors.
Example. Sarah filed for Chapter 7 bankruptcy on January 1, 2012. Her case was closed and discharged on May 1, 2012. On May 10, 2012, her uncle died and left her $100,000. However, she will not receive the money until December of 2012 when all probate proceedings have been completed. She has no exemptions that cover the inheritance. Since Sarah became entitled to receive the inheritance on May 10th (which is within 180 days of her filing date), the $100,000 is considered property of the bankruptcy estate. The trustee will likely take the money and distribute it to her creditors. If there is money left after the trustee repays her creditors and subtracts the trustee commission, Sarah will get to keep it.
Inheritance Received More Than 180 Days After Chapter 7 Filing
If you become entitled to receive an inheritance more than 180 days after you file for Chapter 7, it is not considered property of the bankruptcy estate. The trustee has no claim to your inheritance so you can keep it whether it would have been exempt or not.
Example. In the example above, if Sarah’s uncle died on July 15, 2012 (which is more than 180 days after her filing date), her inheritance would not be part of her bankruptcy estate. As a result, Sarah would be able to keep her entire inheritance.
Why Does the 180-Day Rule Exist?
Congress created the 180-day rule to discourage people from filing for bankruptcy in anticipation of receiving a significant inheritance. The idea is that people should not file for bankruptcy just to protect an upcoming inheritance.