Legally reviewed by Allen A. Kolber, Esq. - The Law Offices of Allen A. Kolber, Esq., P.C.
Key Takeaways
- In Chapter 7, the 180-day clock runs from your filing date, and entitlement begins the day the person died.
- In Chapter 13, there is no 180-day ceiling, so an inheritance in year four still counts.
- An inheritance you were already entitled to before filing is estate property, with no clock involved.
- Disclaiming an inheritance to keep it from creditors can be treated as a fraudulent transfer.
If you receive a considerable inheritance from your loved one who has sadly passed away, you may believe that a lot of your emergent financial issues will automatically disappear. But if timing is really not in your favor, and you declared bankruptcy before realizing you were going to receive this financial aid, you may start to wonder whether this gift is actually a burden. Well, if this is the predicament you are currently stuck in, please continue reading to learn what happens when you inherit money after filing for bankruptcy, and how an experienced Rockland County consumer bankruptcy lawyer at the Law Offices of Allen A. Kolber, Esq., P.C., can help you handle your ongoing case appropriately.
What Happens Legally if I Inherit Money After Filing for Bankruptcy?
If you inherit money after filing for bankruptcy, the timing of it all is everything. This is because of the 180-day rule under the United States Bankruptcy Code. This rule holds that any inheritance you receive or become entitled to within 180 days of filing for bankruptcy must be reported to the bankruptcy court and subsequently may be used to pay off your disclosed debts.
Specifically, the date you become “entitled” means the date the deceased passed away, not the date you receive the money.
Therefore, if the deceased passed away within 180 days of your bankruptcy filing date, your bankruptcy trustee may hold the right to take your inherited money and make it a part of your bankruptcy estate. Of note, your bankruptcy estate is the property and assets your bankruptcy trustee can use to sell, liquidate, and compensate your outstanding creditors. The overall argument here is that this post-filing asset existed at the time of your filing.
The same 180-day window also captures property you become entitled to through a divorce decree or property settlement with your spouse, or as the beneficiary of a life insurance policy or death benefit plan. As such, an inheritance is not the only windfall this rule applies to.
What Happens if I Fail to Report My Inheritance in My Bankruptcy Case?
It is no excuse that you did not know of the inheritance the deceased put aside for you at the time of your bankruptcy filing. Also, it does not matter if the probate process for the deceased’s estate is delayed, and you have not yet received this money. No matter what, as a debtor in a bankruptcy case, you must report this inherited money to your bankruptcy trustee as soon as you learn of it. Otherwise, you may risk facing complications with your bankruptcy case, not to mention other serious consequences.
For one, if your bankruptcy trustee learns of an inheritance through a probate filing rather than your personal report, they may motion to deny or revoke your bankruptcy discharge. This means that your once-dischargeable debts may fall back into your immediate financial responsibility to pay off, without the bankruptcy court’s protection. Even worse, you may be accused of and subsequently charged with bankruptcy fraud, which may result in hefty fines and even imprisonment in a federal prison.
Does the 180-Day Rule Apply in a Chapter 13 Case?
The 180-day rule is where most Chapter 13 filers are surprised. During Chapter 13, the 180 days is not the outer limit. Property acquired after your case begins and before it is closed, dismissed, or converted is considered property of your bankruptcy estate, which means an inheritance received in year four or five of your plan matters just as much as one received in the first month.
In practice, the trustee is generally unlikely to turn around and hand this money directly to your creditors. More commonly, a motion to modify your plan will be filed, which can allow your creditors to receive more of what they are owed by increasing your monthly payment.
What if I Was Already Entitled to the Inheritance Before I Filed?
In the event you were entitled to an inheritance before you filed for bankruptcy, the 180-day rule does not apply. This is because any interest already held on the day you filed is considered part of your bankruptcy estate, regardless of whether or not probate has closed and regardless of if the money is currently sitting in your possession.
Filing first and hoping the clock will protect you does not work, as the clock ultimately extends what the estate captures, rather than limiting it. If you anticipate a distribution, you should raise this concern before filing, since the timing of your petition is one of the few aspects of bankruptcy that is in your control.
Can I Disclaim the Inheritance or Have it Placed in a Trust?
Refusing an inheritance so it bypasses you and goes to your children instead of your creditors is an understandable consideration, but it is risky. The trustee assigned to your case may treat a disclaimer made with your creditors in mind as an attempt to put property outside of their reach, which invites the fraudulent transfer analysis, and, in a bad case, a fraud allegation.
A trust is different, but narrower than it is usually described. Section 541(c)(2) does not protect trusts as a category; it honors a restriction on transferring your interest only where that restriction would already be enforceable under New York law, and a trust you set up for your own benefit will not qualify. Both routes turn on facts specific to your situation, which is exactly the kind of question to put to counsel before you act rather than after.
Contact an Experienced New York Bankruptcy Attorney
For further legal assistance, please hire a skilled Rockland County consumer bankruptcy lawyer from the Law Offices of Allen A. Kolber, Esq., P.C. Contact us today to schedule your initial consultation, and see just how much we can do for you.
