Help! I’m in Bankruptcy and Just Inherited Property. What Happens Next?

February 3rd, 2017 by Bunch & Brock

They say timing is everything, and that is certainly true when it comes to bankruptcy. What you own and what you owe must be listed in the schedules that you file with the bankruptcy court. But what about income or assets that come your way while your case is pending?

Whether anticipated or not, the federal Bankruptcy Code requires the reporting of any funds that a debtor becomes entitled to within 180 days of the date he or she filed for bankruptcy. That means inherited money or property becomes part of the bankruptcy estate if the grantor passed away less than 180 days after the grantee/heir/debtor filed for bankruptcy, unless an exemption applies. The date of death is the date of measurement, because that is the day the debtor became entitled to inherit. The date the inheritance is actually collected – which may be months or years later – is immaterial.

A debtor who has filed for a Chapter 7 bankruptcy and then receives an inheritance within 180 days will see it taken by the trustee to pay creditors unless it fits under one of the exemptions. Kentucky allows debtors to choose between applying a set of state exemptions or a set of federal exemptions, both of which include exemptions up to certain amounts for a homestead, a motor vehicle, household goods, tools of the trade, and life insurance policy proceeds, among other items. Nonexempt property that is inherited within 180 days of a Chapter 13 bankruptcy petition will have its value added to the repayment plan, increasing payments to unsecured creditors.

Anything inherited more than 180 days after filing under Chapter 7, whether exempt or not, cannot be claimed by the trustee. However, inheritance after the time period has passed in a Chapter 13 filing may still be considered by a judge when deciding on a motion to amend the repayment plan, which can occur at any point in the plan’s duration (three to five years). The general line of reasoning is that it would be unfair to creditors to allow a debtor to benefit from a windfall.

A word of caution for married couples: if one spouse has declared bankruptcy and the other receives an inheritance, be careful not to commingle funds. The inheritance of the non-filing spouse is separate property and not included in the bankruptcy estate. However, if the non-filing spouse uses inheritance money to buy the filing spouse something expensive, such as a car or boat or jewelry, that personal property may become part of the estate.

If you are thinking about filing bankruptcy or have already filed and are unsure whether you have to disclose an inheritance, it is wise to seek the counsel of a bankruptcy lawyer who can help you evaluate your situation and determine the best course of action. Based in Lexington, the KY bankruptcy attorneys at Bunch & Brock have more than 35 years of experience handling personal bankruptcy cases across Kentucky. To get started, or if you have any questions about this topic, call us at 859-254-5522. You can also reach us by filling out this online form.