If you are expecting an inheritance, or even if you are not, the special rules about them are worth your attention to prevent bad surprises.
Most people thinking about filing bankruptcy aren’t expecting an inheritance.
But if you are, there are some very important timing rules that can affect whether and when you’ll file bankruptcy.
And even if you are not expecting an inheritance, these rules are helpful to know in case you unexpectedly do receive one.
Fixation on Property Owned at the Moment of Filing Bankruptcy
When we introduced “property of the estate” a week ago we emphasized that it’s comprised of everything you own at the “commencement of the case.”
The timing is crucial. Usually any property you acquire in the days and months after filing a Chapter 7 case is not “property of the estate.” It doesn’t fall within the jurisdiction of the bankruptcy court or the reach of the liquidating Chapter 7 trustee. You don’t have to protect that property with exemptions. It’s simply yours.
This feature is an important part of the “fresh financial start” that Chapter 7 bankruptcy provides. After that moment in time when you file your case you’re generally free to earn and acquire income and assets. They are beyond the reach of your creditors.
Inheritances are an exception to this.
The 180-Days-after-Filing Inheritance Rule
If within 180 days after you file bankruptcy you “acquire or become entitled to acquire” an inheritance, then the property being inherited is counted as if it was your property at the time you filed. (See Section 541(a)(5)(A) of the Bankruptcy Code.)
In other words, whatever you inherit within that 180 days becomes “property of your Chapter 7 estate.” To whatever extent the inherited property isn’t exempt or protected some other way, the Chapter 7 trustee can take and liquidate it to pay your creditors.
Includes Interests in Property Acquired by “Bequest, Devise, or Inheritance”
The term “inheritance” specifically means property received through state laws distributing the property of a decedent who did not leave a will. The 180-day rule covers this.
But it also covers property acquired through a will. A “bequest” and a “devise” are provisions in a will giving away the personal property and real estate, respectively. These are also covered by the 180-day rule.
Ignorance is No Defense
It does not matter that you did not expect to receive anything through someone’s death. It doesn’t matter that you don’t even know that the person leaving you something has died. Any such property is yours for bankruptcy purposes regardless of your lack of knowledge about them.
So before filing bankruptcy, think about who you might possibly inherit from. Consider the likelihood that the person could die within the following six months. Talk with your bankruptcy lawyer about it. There may be some favorable ways of dealing with this situation that would protect some or all of that inheritance for you, if you inform your lawyer in advance.