Inheritances in Bankruptcy
Chapter 7
Under a Chapter 7 bankruptcy, the trustee looks to the timing of the inheritance. If the inheritance was before filing, any amount on hand at the time of filing will become part of the estate. When it becomes part of the estate, an individual will have to exempt it in order to protect it. Any portion of the inheritance that is nonexempt will allow the trustee to take it and distribute it to creditors. If an individual is entitled to receive an inheritance 180 days after filing the bankruptcy, the inheritance will not become part of the estate and the trustee will have no claim to any of it. However, if an individual is entitled to receive an inheritance within 180 days of filing for bankruptcy, they will need to amend their bankruptcy paperwork regardless of whether the court closed the case or not. Similar to an inheritance prior to filing for bankruptcy, the inheritance will need to be exempted through an amendment, if it cannot be exempted then the trustee will be able to take that portion and distribute it to creditors.
Chapter 13
Under a Chapter 13 bankruptcy the individual may still need to exempt the inheritance, similar to a Chapter 7. If the case is a 36-month ACP, then if the client becomes entitled to receive the funds after successfully making payments for 36 months, then the inheritance becomes the clients. A case becomes a 36-month if they pass the means test and were eligible for a Chapter 7, but regardless, filed a Chapter 13.
In any other scenario, the client will need to exempt as much of the proceeds as possible, then put forth an application outlining what unexpected expenses they have to retain the inheritance for, much like they would for a tax refund.