Inheritance, including life insurance proceeds, and bankruptcy can prove to be a very serious issue if not planned for correctly. An individual, depending on timing, may have to surrender a portion or all of an inheritance or life insurance proceeds as a result of filing bankruptcy. This article discusses inheritance in the context of bankruptcy, and the potential issues that may arise.
The rule regarding inheritance or life insurance proceeds in the context of bankruptcy is fairly simple. If you become entitled to inheritance or life insurance proceeds within 180 days from the time you file your bankruptcy, the inheritance or life insurance proceeds may be forced back into your bankruptcy to pay your creditors. The operative phrase here is: “become entitled.” If someone passes away in the 180 day period, even if it is on the 180th day, and you become entitled to an inheritance as a result, this inheritance may be subject to the bankruptcy. If the same person passes away on the 181st day after you file your bankruptcy, any inheritance is not subject to the bankruptcy. As you can see, there is a potentially huge timing issue here.
If a debtor (the person who files bankruptcy) becomes entitled to an inheritance or life insurance proceeds within the 180 day period, they must let their attorney know and let the trustee (the person who administers the bankruptcy) know. The trustee will then give notice to the creditors in the bankruptcy case, the creditors will file bankruptcy proof of claims, and the trustee will pay on these proof of claims from the inheritance proceeds. A portion of the inheritance proceeds may be protected, however, with exemptions (or laws that protect property) afforded to the debtor. The debtor will never need to pay more than he or she owes. For example, a debtor owes $50,000 in debt, and becomes entitled to $500,000 in an inheritance. The debtor will, at most, need to pay the $50,000 (based on proof of claims filed) plus the commission of the trustee. The remaining funds will be returned to the debtor.
Sometimes, a person will pass away unexpectedly, and a debtor who filed bankruptcy learns that he or she may be entitled to inheritance or life insurance proceeds. In this case, the bankruptcy attorney and the trustee must be notified.
What if you have assets that you want to give to a family member upon your passing, but you are afraid that this person may eventually file bankruptcy, or you are concerned that creditors may attach any assets given to this family member. My advice: meet with an estate planning attorney. Certain spend thrift trusts may be used, or other financial vehicles may be created. A competent estate planning attorney can help you to protect any assets you may bequeath through a will to a person who may be filing for bankruptcy or may have creditors that might seize any inheritance proceeds.
If you are interested in learning more about bankruptcy and the ramifications on potential inheritance, please call today to schedule your free in-office consultation in Eugene.
I look forward to hearing from you.
Butcher Law Office, LLC
116 State Highway 99 N #101
Eugene, OR 97402