What Happens To Your Inheritance In Chapter 7 Bankruptcy?

The Chapter 7 bankruptcy process can be an effective tool for managing and eventually eliminating most of your debts. As with any debt management tool, it's important to understand how certain assets will be treated. For instance, a Chapter 7 bankruptcy can bring about significant consequences if you've received or are set to receive an inheritance.

The following provides an in-depth explanation of how Chapter 7 bankruptcy may affect recently inherited property and assets.

Filing for Bankruptcy Could Put Your Inheritance at Risk

The moment you file for Chapter 7 bankruptcy is the moment when the property you own as well as the debts you owe to creditors fall under the management of an assigned bankruptcy trustee. In an effort to make sure your creditors receive due compensation for outstanding debt, the trustee may look for nonexempt property and other assets that can be freed up and sold off in order to repay the creditors.

Such nonexempt property could include any property or assets you may have recently inherited. Whether or not inheritance property falls under the trustee's management mainly depends on how long ago you received your inheritance of regards to your bankruptcy filing.

The 180-Day Rule

Filing for Chapter 7 bankruptcy within 180 days of becoming entitled to receive an inheritance could place it under the control of the trustee as a part of your bankruptcy estate. This is due to what is commonly known as the 180-day rule. This rule exists to discourage people from filing for bankruptcy when they are set to receive a significant inheritance. The idea is that anyone who's in debt and expecting to receive a generous inheritance should use their windfall to pay back their debts and not use bankruptcy as a way to protect their inheritance.

According to the 180-day rule, if you are entitled to receive an inheritance within 180 days of your Chapter 7 bankruptcy filing date, the inheritance will instead be considered property of the bankruptcy estate. The bankruptcy trustee will instead take the proceeds of that inheritance and distribute it to your creditors in an effort to cover your outstanding debts.

If you become entitled to receive an inheritance more than 180 days after your bankruptcy filing date, you'll get to keep your inheritance since it's not considered property of the bankruptcy estate.

Exceptions to the Rule

It may be possible to have some or even all of your inheritance exempted from your Chapter 7 bankruptcy proceedings. Federal and state bankruptcy exemption amounts can apply to your inherited assets. For instance, if you inherited an asset that is worth $2,500 and the maximum bankruptcy exemption for your state is the same amount, you may be able to keep your asset. If the asset is worth more than that amount, the bankruptcy trustee may liquidate the asset and return the exempted portion of those proceeds to you.

In some cases, the trustee may decide to abandon an asset even if it isn't completely exempt. This usually happens when the trustee isn't able to liquidate the asset because the associated fees and other costs eat away any leftover proceeds that would otherwise be used to repay your creditors.

Another way you can protect your inheritance is by having the property be left in a revocable living trust instead of a will. Some courts have ruled that property inherited through a revocable living trust is not included as part of the bankruptcy estate.

Determining whether or not your impending inheritance could be affected by a Chapter 7 bankruptcy filing can prove confusing in some cases. It's usually a good idea to consult with an experienced bankruptcy attorney before deciding to go through with Chapter 7 bankruptcy, especially if there's an inheritance in the works.

Consider the following to discover more on Chapter 7 bankruptcy.