If you receive an inheritance or cash gift while in Chapter 13 bankruptcy, you might be required to amend your repayment plan and increase what you pay to unsecured creditors. Read on to learn more about how your inheritance or cash gift 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. If you receive an inheritance during Chapter 13 bankruptcy, it will usually be part of your bankruptcy estate, but that’s not always the case with a cash gift.
Will You Lose Your Inheritance or Cash Gift 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 portion of your debts back through a three- to five-year repayment plan. However, if you receive a significant inheritance or cash gift, the trustee will want you to pay more to your unsecured creditors. If successful, this can significantly increase your monthly plan payment amount.
(To learn more about Chapter 13 bankruptcy and the repayment plan, see Chapter 13 Bankruptcy.)
How Does Your Inheritance Affect Your Repayment Plan?
How much of your inheritance you might be required to pay will depend on when your inheritance was received and the rules of your local court. Keep in mind that inheritance is considered received when you become entitled to it (usually when the decedent passes away), not when you collect it.
- Inheritance received after 180 days of filing for Chapter 13 bankruptcy. Even if you receive your inheritance more than 180 days after filing your Chapter 13 case, the bankruptcy trustee might 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. Check with a local bankruptcy attorney about the rules in your area.
- Inheritance received within 180 days of filing for Chapter 13 bankruptcy. If your inheritance were received within 180 days of filing your case, the trustee would 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 be entitled to that amount in a Chapter 7 case. (To learn more, see Unsecured Debt in Chapter 13: How Much Must You Pay?)
Example. Let’s assume you filed for Chapter 13 bankruptcy on January 1, 2017. Subsequently, your aunt died and left you $50,000 on March 1, 2017. 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 in a 100% repayment plan.
What Happens If You Receive a Cash Gift During Your Chapter 13 Bankruptcy?
If you receive a cash gift during your Chapter 13 bankruptcy, it might be both an asset and income in your case. Whether the bankruptcy trustee can successfully argue that you should use the cash gift to repay your creditors depends on when you received it and the rules in your jurisdiction.
- Cash gifts received before plan confirmation. It can be several months after the filing of your case before the court confirms (approves) your repayment plan. If you receive a cash gift after filing but before confirmation, the trustee typically can’t use the best interest of creditors test to increase your payment. Why? Because unlike an inheritance, a Chapter 7 trustee wouldn’t be able to take a cash gift received after your filing date to pay your creditors (assuming that you weren't entitled to it before filing your case). But the trustee might be able to argue that the cash gift gives you additional disposable income that should go to your unsecured creditors. So you might have to pay all or a portion of it to your creditors in your Chapter 13 plan if you want the court to approve your case.
- Cash gifts received after plan confirmation. If you receive a cash gift after plan confirmation, the trustee might still ask the court to modify your plan and increase the amount you are paying to your unsecured creditors. But the trustee may have a harder time convincing the court to increase your payment. In a recent case, the United States Bankruptcy Court for the Central District of Illinois denied the trustee’s motion to modify the debtors’ repayment plan after confirmation to increase the dividend going to unsecured creditors because of an increase in income. In re Coay, 2012 WL 2319100 (Bankr. C.D. Ill. (2012)). So if you receive a cash gift after your plan is confirmed, the trustee likely can’t increase the amount you are paying to your unsecured creditors, at least in Illinois. You should contact a local attorney to learn how your court will handle this information.