June 27, 2019

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What Happens to Inheritance in a Bankruptcy Case?

When it comes to collecting a debt in a bankruptcy case, creditors aren’t usually picky about where the money comes from, as long as it’s eventually paid back. But legally speaking, there are limitations on which assets can be used to pay a debt. Some property is exempt from such transactions.

In this post, we will outline some of the considerations surrounding inheritance in a bankruptcy case, identifying along the way the underlying federal guidelines and methods for protecting inherited property or funds.

The Estate

To begin with, when you first file for bankruptcy, a list (known as an estate) will be made by the Court and will contain all assets available to the creditor for repayment. The ultimate goal of bankruptcy law is to extricate you from debilitating debt while balancing that with the rights of creditors. With a good lawyer, you may manage to keep some portion of your assets.

To this end, certain kinds of property are considered “exempt.”  Those items deemed “necessities of modern life” are most often included in this category. These include items that are needed to live and work, such as:

  • Retirement accounts
  • Pensions
  • Household items
  • Clothing
  • Jewelry
  • Certain compensation from a personal injury claim
  • Automobiles

But if you have expensive musical instruments lying around for non-professional use or if you own a second home, these items would be considered superfluous in regard to your day-to-day life and would most likely be placed in the non-exempt category. The question, then, is whether an inheritance would be exempt or non-exempt in the eyes of a bankruptcy court.

Federal Bankruptcy Code

An inheritance may be included in a repayment plan under certain conditions. According to the federal bankruptcy code, if you already received an inheritance before filing for bankruptcy or if you “acquire [an inheritance] within 180 days after” filing a petition, then those funds could be included in the estate and thus could be used to pay off your debts. These conditions also apply to money gained through a life insurance policy or “death benefit plan” and property gained through a divorce settlement.

Extraordinary Circumstances

Because of these stringent criteria, you may find it incredibly difficult to protect your inheritance in a bankruptcy case. If you find yourself in the unique and unfortunate circumstance of filing bankruptcy while expecting to inherit money from a passing relative, you may want to ask your relative to take you out of the will and to leave the money to your children or a close relative. That way creditors won’t be able to touch the money. You may also ask your passing relative to place the funds in a spendthrift trust. This type of trust limits the beneficiary’s ability to use the funds and bars creditors from accessing the funds.

Perhaps you already have the inherited money in your possession. In such a case, you should contact an experienced bankruptcy attorney who can help you accomplish the very difficult task of protecting your inheritance from creditors.

About Sean Lally

Sean Lally holds a BA in Philosophy from Temple University where he also studied theatre for several years. Between 2007 and 2017, he worked as a professional actor for several regional theater companies in Philadelphia, including the Arden Theatre Co., EgoPo Productions, Lantern Theater and the Bearded Ladies. In 2010, Sean co-founded Found Theater Company, an avant-garde artist collective with whom he first started to cultivate an identity as a writer.

Over the past few years, Sean has been working as a content writer, focusing primarily on the ways in which unequal power distribution can negatively affect consumers, workers and “everyday people,” more broadly. He writes for a number of websites including AccidentAttorneys.org, PersonalInjury.com, AmericanLegalNews.com and others.