Chapter 7 Bankruptcy & Inheritance: A Complicated Matter. As soon as you file a chapter 7 bankruptcy, the clock starts ticking. Hopefully, you will not become entitled to an inheritance for the next 180 days. Why is this? A little explanation is in order.
As soon as you file bankruptcy, most of your assets become part of what is known as the “bankruptcy estate,” and is administered by a bankruptcy trustee. Most assets can be protected by the use of exemptions (or laws that protect your property). Inheritance, or the right to inheritance, is a potential bankruptcy asset that may not even exist at the time of filing for an individual. However, the bankruptcy code provides a look-forward period of 180 days for inheritance and/or life insurance proceeds. This means that if someone (family member, friend, etc.) were to pass away within the 180-day period following a bankruptcy filing, and you are entitled to an inheritance or proceeds from a life insurance policy as a result, this inheritance and/or life insurance proceeds vests into your bankruptcy estate as an asset that can be potentially administered by the bankruptcy trustee for the benefit of your creditors.
Depending on the amount of the inheritance or life insurance proceeds you receive as a result of someone passing away within 180 days of your bankruptcy filing, we may be able to protect a portion or all using exemptions. However, if exemptions are not available to us (because we used them to protect other assets), or if the inheritance of life insurance proceeds are substantial enough, this asset will need to be turned over to the trustee of the bankruptcy, and administered for the benefit of your creditors (meaning, your creditors will receive payment from the inheritance or life insurance proceeds).
Now, if someone were to pass away on the 181st day or more after you file bankruptcy, any inheritance or life insurance proceeds that you may become entitled to will be outside of the bankruptcy estate, meaning you can fully enjoy this and not have to turn it over to the trustee for the benefit of your creditors.
Why did Congress write this 180-day look forward provision into the bankruptcy code? It was a policy decision, following the rationale of: why allow people to file bankruptcy on the eve of receiving an inheritance, where the inheritance could be used to pay creditors. Like anything, there are different opinions about this policy.
I always make certain my clients understand this concept and the risks involved before they file for chapter 7 bankruptcy.
If you have any questions regarding bankruptcy and how it may affect a future inheritance, please call to schedule a free in-office bankruptcy consultation.