Can Bankruptcy Trustees Take Inheritances?
- With regard to an inheritance coming to a debtor who is in Chapter 7 bankruptcy, the bankruptcy trustee's access to the inheritance is contingent on the date of death. The inheritance may become subject to use or liquidation to pay off debts if the debtor inherits money or property within 180 days after filing the bankruptcy petition. The debtor need not actually receive the money or property; if the decedent dies within 180 days after the debtor files bankruptcy, and the debtor anticipates an inheritance from the decedent, he must report it. In Chapter 7 bankruptcies, the trustee may be able to use the entire amount of the inheritance to satisfy the debtor's debts, unless an exemption applies, but if the decedent dies after the 180-day period, the trustee has no claim to it. The matter is different in Chapter 13 bankruptcies.
- Chapter 13 bankruptcies utilize a repayment plan spread out over 3 to 5 years, and treat inheritances slightly differently. The trustee may factor the amount of the inheritance into the decedent's repayment plan. Under Chapter 13, the decedent may be able to keep some of the inheritance, but may need to pay more according to the repayment plan.
- The discreet nature of an inheritance may entice a debtor to consider avoiding disclosure. When a debtor files bankruptcy, he declares, under penalty of perjury, that all the information is true, and that the debtor will properly amend the information if things change. Failing to disclose an inheritance that is potentially subject to creditor claims may result in perjury charges or dismissal of the bankruptcy case.
- While Chapter 13 may preserve some of the inheritance, the court may convert the proceeding to a Chapter 7 action. If the debtor fails to comply with the terms of the repayment plan, the bankruptcy action may become a liquidation proceeding. This may potentially place the inheritance at risk. Because of the legal nature of bankruptcy, readers should seek legal advice, as necessary.