Chapter 7 and Inheritances

What happens if, after you file for a Chapter 7 bankruptcy, a parent, spouse or other family dies leaving you some money or other items of significant value? Does this affect your bankruptcy? Are you entitled to keep the inheritance or must you turn it over to the Trustee or your creditors? The answer to these questions is, of course, it depends. What does it depend on? Let’s discuss.

You file for a Chapter 7 bankruptcy. You are a typical “no asset” case, meaning you don’t have any assets to be liquidated and distributed to your creditors. You may or may not own a home, but even if you do, the debt on it exceeded your equity or the equity in your home (and other assets) was within the exemption limits.

You filed your Petition. You may or may not have had your 341 Meeting (Meeting of Creditors) and you may or may not have received you discharge. Your bankruptcy may or may not have been closed by the Court. According to Section 541 of the Federal Bankruptcy Law (11 U.S.C. 541), if you receive or become entitled to receive an inheritance within 180 days of the filing of your bankruptcy petition, then the inheritance is part of you bankruptcy “estate.”

In practical terms, what that means is that is anything you inherit falls outside of any of your exemptions, the Trustee most likely will claim the inheritance and distribute it to your creditors.

The good news is that if your right to inherit is acquired 181 days or longer after you filed your bankruptcy petition or the amount of your inheritance is within your exemptions, you may be able to keep everything you inherited. As always, you should contact a bankruptcy lawyer in your area for specific advice tailored to your individual circumstances.

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