What Happens To Your Inheritance In Chapter 13 Bankruptcy?

Knowing how to manage debt is an important part of financial recovery. The Chapter 13 bankruptcy process offers debtors a way to repay part or even all of their debts over a short period of time using their regular income. If you've recently received or are expecting to receive an inheritance, you'll want to know how the Chapter 13 bankruptcy process will affect the status of your sudden windfall.

You May Get to Keep Your Inheritance, In Some Cases

When it comes to the status of your property and other assets, Chapter 13 bankruptcy works similarly to its Chapter 7 counterpart—all of your current property and most of the property you acquire during your Chapter 13 case is usually included in the bankruptcy estate. This includes any inheritance you expect to gain while your case is ongoing.

In a Chapter 7 bankruptcy, the trustee has the ability to liquidate inheritances and other property in an effort to fulfill outstanding debt obligations on behalf of the debtor. Since Chapter 13 doesn't involve asset liquidation, your inheritance won't fall under the direct control of your trustee. However, it may still be factored into your repayment amount, as is explained in the next section.

Also keep in mind that some states allow you to exempt part your inheritance from becoming a part of the bankruptcy estate. However, any nonexempt amounts must be included as part of the estate.

You May Have to Pay More

In a Chapter 13 bankruptcy, the aim is to manage debt by creating a reasonable repayment plan based on your current disposable income and the total value of your nonexempt property. This value must meet or exceed the total amount you would have paid your creditors under Chapter 7, thereby meeting the "best interests of creditors" test.

If your state's bankruptcy exemptions don't cover your inheritance, it may be considered as part of your disposable income. Your trustee may factor this sudden windfall into your monthly payments, thereby increasing the amount you must pay to your creditors each month. If you've inherited $10,000 and owe debts exceeding that amount, for instance, you must put that $10,000 towards repaying your creditors. However, the $10,000 amount will be spread out over the course of your 3-year or 5-year payment plan.

The 180-Day Rule Also Applies, In Most Cases

As with Chapter 7 bankruptcy, the 180-day rule also applies to Chapter 13 bankruptcies. If you receive an inheritance within 180 days of your bankruptcy filing, the windfall will be factored into your debt payments. Outside of that 180-day period, however, you may be able to exempt your windfall from the bankruptcy proceedings.

However, some courts have ruled that the 180-day rule doesn't apply as long as the bankruptcy itself is ongoing. In Carroll v. Logan (In re Carroll), 735 F.3d 147 (2013), the court ruled that any inheritance acquired prior to the end of the Chapter 13 case must be included as part of the bankruptcy estate, even if it was acquired by the debtor 180 days after the bankruptcy filing. Not all states have come to the same conclusion, so it's a good idea to consult with your bankruptcy attorney to understand your state's position on the matter.

Don't forget that failure to disclose an inheritance to your trustee may constitute bankruptcy fraud, as you are under oath to disclose any and all significant financial changes that occur throughout the bankruptcy. Even if you're not set to receive your inheritance until the next year or later, you're still obligated to disclose your potential windfall. Penalties for committing bankruptcy fraud can include significant fines and even jail time.

For more information, contact a bankruptcy attorney at a law firm such as Biales Delchin Law LLC.