If you are in a Chapter 13 Bankruptcy, where you pay monthly payments for the benefit of your creditors, and you receive an inheritance or life insurance proceeds, this can complicate matters, somewhat.
The Chapter 13 Trustee (the official who administers your chapter 13 bankruptcy) will either view this as an asset of the bankruptcy estate, to be paid over time into your chapter 13 bankruptcy plan for the benefit of your creditors, or view it as disposable income, that must be paid into the chapter 13 bankruptcy plan for the benefit of your creditors. Depending on how your chapter 13 bankruptcy is structured, most, if not all, of the proceeds may be paid into the bankruptcy for the benefit of your creditors. If there are emergency or necessary expenses, sometimes we are able to retain some of the funds in order to cover these expenses, with the remaining funds being paid into the chapter 13 bankruptcy.
If your chapter 13 bankruptcy is a 100% plan, meaning you are paying back all your creditors through the bankruptcy, there will be the ability to retain the inheritance to a greater degree.
Now, if you receive a substantial inheritance while you are in the middle of a chapter 13 bankruptcy, there are a few options to consider. First, you can send the funds to the chapter 13 trustee to distribute to your creditors (with the possibility of retaining some for necessary expenses). Second, if the inheritance is substantial enough, you may decide to exit the chapter 13 plan, as you have an absolute right to exit your chapter 13 bankruptcy, and deal with your creditors outside of the bankruptcy context.
Chapter 13 bankruptcy lasts from 3-5 years generally. It is very hard to plan for all contingencies during this period. If you are interested in finding out more about how inheritance may interact with either a chapter 13 bankruptcy or a chapter 7 bankruptcy, please call for a free in-office bankruptcy consultation.