If you become entitled to receive an inheritance before filing for Chapter 7 bankruptcy, you'll have to exempt (protect) it with a bankruptcy exemption to keep it. Additionally, unlike most other property, a trustee might be able to take an inheritance up to 180 days after you file. Learn why.
In Chapter 7 bankruptcy, you can keep the things you'll need to maintain your employment and a modest home, but not much more. Here's how it works.
Almost all of your assets become a part of the bankruptcy estate the moment you file for Chapter 7 bankruptcy. The bankruptcy trustee sells assets you can't protect with a bankruptcy exemption (known as nonexempt assets) and distributes the funds to your creditors. In most cases, you wouldn't need to worry about property or funds you acquired after filing for bankruptcy—they'd be yours.
Here's the tricky part: A special bankruptcy rule extends the date for inheritances. If you become entitled to an inheritance within 180 days of filing for bankruptcy, it will become part of the estate. To keep it, you'll have to exempt it.
In most cases, the entitlement date would be the date the person passed away. Not the day you actually collect the inheritance, which could be months later.
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 shouldn't file for bankruptcy just to protect an inheritance.
Here's how the rule could affect your inheritance depending on the date you become entitled to it.
Example. Makayla filed for Chapter 7 bankruptcy on January 1, 2018. The case closed on May 1, 2018. Nine days later, her uncle died and left her $100,000 that she can't protect with an exemption. Since Makayla became entitled to the inheritance on May 10, 2018—less than 180 days of her filing date—the $100,000 is part of the bankruptcy estate. The trustee will pay her creditors and return any remaining portion to her after deducting the trustee commission.