Like everything else you own when you file for bankruptcy, property you inherited before the bankruptcy becomes property of the estate and under the control of the trustee, unless you can claim it as exempt. Any property you inherit, or become entitled to inherit, within the 180 days after you file for bankruptcy also becomes property of the estate and can be sold by the Chapter 7 trustee.
Exemptions
Claiming property as exempt is a way to keep it out of the bankruptcy estate and safe from the trustee and creditors. Exemptions exist under both federal bankruptcy law and state law. In some states, you are allowed to choose between federal and state exemptions to select the option that provides the most protection for property you own. Other states require you to use only state exemptions. You are generally permitted to amend your exemptions during your bankruptcy case.
Determining Equity
To determine whether an exemption limited in amount will protect your inherited property, you compare it to the value of your interest in the property after deducting liens and mortgages. If the exemption amount is greater, the property can be protected. If it is less, the property is not entirely safe. If there is value, or equity, over the exempt amount, a Chapter 7 trustee can sell only the non-exempt portion, seek a court order authorizing the sale of the entire property, or abandon the property; i.e., allow you to keep it.
Administration
If the trustee sells just the non-exempt portion, you will still own the exempt portion but the buyer will be your co-owner. If the court allows the trustee to sell the entire property, you will receive the exempted amount, less costs, at the conclusion of the sale. If selling the property would not bring money into the bankruptcy estate to pay creditors other than mortgage holders, the trustee could decide not to bother with it at all and abandon it. In this case, you would retain your original interest in the property.
Chapter 13
Things work differently in a Chapter 13 bankruptcy case, which is a repayment plan rather than a liquidation. Generally, the Chapter 13 trustee does not sell your property, even if it is not exempt; instead, you submit a plan to pay your debts in full or in part over three to five years. Equity in non-exempt property, including inheritances, is taken into account when the trustee calculates your Chapter 13 plan payments. If you inherit during the 180 days after filing, or any time while your bankruptcy case is pending, you may need to file a modified plan increasing your payment; however, you get to keep the property.
