Personal bankruptcy is a legal process designed to allow individuals who have become overwhelmed with debt to get a fresh financial start. Receiving an inheritance shortly before or after filing for bankruptcy can be heartbreaking for anyone who does not wish to see their legacy used to pay off creditors. Depending on your state's laws, timing, and the extent of your other assets, you may be able to keep your inheritance through bankruptcy.
Assets of the Bankrtupcy Estate
One you file a Chapter 7 or Chapter 13 personal bankruptcy, all of your legal assets and interests in property, as well as any communal property owned by you and your spouse, are considered property of the bankruptcy estate. This would include any inheritance you received prior to filing the bankruptcy, unless the inheritance was placed in a spendthrift trust, which is not counted as bankruptcy estate property. In a Chapter 7 bankruptcy, all assets that are not exempt are liquidated to pay your creditors. If you have enough regular income to qualify for a Chapter 13 bankruptcy, you may be able to keep any assets you own outright, such as property acquired through inheritance, while making payments to your creditor under a three- to-five year payment plan.
Inheritance and Chapter 7 and 13
Money acquired by inheritance for up to 180 days -- six months -- after filing bankruptcy is considered part of the bankruptcy estate. In Chapter 7 bankruptcy, money which you inherit due to a death occurring within 180 days after you file for bankruptcy may be seized by the bankruptcy trustee and paid out to your creditors, even if you have already received the bankruptcy discharge. If you had not already made use of the full allowable Chapter 7 exemption amounts, you may be able to retain all or a portion of the inheritance. If the inheritance is particularly small, the trustee may opt not to re-open the bankruptcy, but regardless of the size of the inheritance, the trustee must be notified. In a Chapter 13 bankruptcy, the trustee may determine that an inheritance received due to a death occurring within 180 days of filing may increase the payments you are capable of making to creditors under a repayment plan.
If you are the recipient of a pay-on-death account before or within 180 days after filing a bankruptcy, you should inform the bankruptcy trustee promptly. Depending on your state's laws, however, you may not be required to turn the money over to the bankruptcy trustee. Whether you had a legal interest in the account prior to the account holder's death, and whether the account funds constitute a bequest, devise or inheritance that must be included in your bankruptcy assets, are matters of state law that vary depending on your state of residence. If you have not reached your maximum exemptions, the pay-on-death funds may also be exempt from the bankruptcy estate.
Disclaiming, or refusing, an inheritance before or after filing for bankruptcy may avoid having the funds used to pay your creditors, and allow the inheritance to instead go to the next beneficiary. Depending on the laws of your state and the state in which the inheritance originates, however, an inheritance disclaimer may be voided as a fraudulent transfer. A disclaimer may also negatively affect you regarding any tax liens that may have arisen in the same time period as the bankruptcy. Consult a locally licensed attorney before disclaiming an inheritance while considering or after filing for bankruptcy to ensure you understand the impact under your state's laws.