In a perfect world, you'd have a crystal ball to see into the future before you give up the fight to pay off debts you can no longer afford to pay. You could file for bankruptcy protection knowing for sure what you stand to lose. But you typically can't anticipate someone's death, so if you've already filed for bankruptcy protection when you inherit a house it could potentially become part of your bankruptcy estate. The home could be vulnerable to your creditors, depending on when the decedent dies and what you do with the property.
Timing of Inheritance
Federal law governs bankruptcy, so the rules are mostly the same whether you file in Michigan or elsewhere. It sets a window of time during which you could lose your property to bankruptcy if you receive an inheritance in a Chapter 7 proceeding. When you file for Chapter 7 protection, the trustee liquidates your non-exempt assets and distributes the proceeds among your creditors. If your creditors aren't paid entirely, your bankruptcy discharges or erases your legal liability to pay the balances. The bankruptcy trustee can sell your inherited house and give the proceeds to your creditors if the decedent dies within 180 days of your bankruptcy filing, even if you didn't actually receive the house until several years after his death. If you owe less to your creditors than what the home sells for, you would receive the balance of the proceeds. After 180 days, your inheritance is safe from liquidation.
If you're living in your inherited home, you may be able to exempt it from your bankruptcy estate. Michigan law allows a homestead exemption of $30,000, or $45,000 if you're over age 65. Exemptions protect property you don't want the trustee to sell in Chapter 7 proceedings, but the homestead exemption might not cover all of the house's value. If the home is worth $300,000 and you use the $30,000 Michigan homestead exemption, $270,000 in equity remains that the trustee could give to your creditors after a sale of the property, returning the $30,000 exemption to you. Also, the homestead exemption applies only to your residence, so if you inherit a home and decide to rent it out while you live elsewhere, the homestead exemption cannot protect it from being turned over to the bankruptcy trustee.
Under the terms of a Chapter 13 court-approved payment plan, you pay off at least a portion of your debts and your property is not at risk for sale by the trustee. When you file for Chapter 13 protection, you agree to give the trustee your disposable income each month, and the trustee uses this money to pay your creditors. You won't lose your inherited home, but it's value may be factored into your disposable income that you give to your trustee each month to pay your creditors. If you rent the house, the rental income can also count toward your disposable income, possibly increasing your payments to the trustee. There's no 180-day limit as to when your inheritance counts if you file for Chapter 13; it's included in your bankruptcy estate throughout the entire duration of your repayment plan, usually three to five years.
Failure to Disclose
If you're contemplating not mentioning your inheritance to your trustee, you might want to think twice. Intentional failure to disclose all your assets is bankruptcy fraud, a federal offense. Transferring an inherited asset to someone else with the intention of taking it back after your bankruptcy is completed is also fraud. If the trustee finds out about it, you could face federal criminal charges.