The Bankruptcy Code requires that the Chapter 7 Trustee be notified if, within 180 days or 6 months after you file bankruptcy, you inherit any money or property from someone who has died or if you are to receive life insurance benefits from someone who has died. The funds or property become the property of the bankruptcy estate and can be used to pay creditors. Further, in Chapter 13 bankruptcy, the inheritance or life insurance could be considered disposable income necessary to pay your creditors in the chapter 13.
This reporting applies whether you take actual physical possession of the property and funds or simply become entitled to the property within the 6 month period following the filing of bankruptcy because the person dies during that 180 days and then you actually receive the money or property at a later date.
Examples of Inheritance
The chances of being entitled to an inheritance within 6 months of filing a bankruptcy are rare, however, it does occur. For example, you could inherit an interest in a house that would then need to be sold so the proceeds can be paid to your creditors. If you and your spouse file a joint bankruptcy and the spouse passes away within the 180 days of filing the bankruptcy and you are the beneficiary of your spouse’s life insurance, those insurance proceeds must be turned over to the Trustee. Another example is if you are a beneficiary of someone’s retirement funds, then if that person dies in the 180 days after you file your bankruptcy, the retirement funds would become the property of the bankruptcy estate and you would be required to pay those funds to the Trustee to be distributed to your creditors.
It is very important that you notify your attorney at Bond & Botes, P.C. if you inherit or become entitled to money or property so that they can take the appropriate steps to seek permission for you to use the funds for a funeral, exempt or protect any amounts that can be protected and notify the Trustee so the Trustee can determine what debt you owe to your creditors so that the Court can determine if you will receive any of the funds back.
If you have a family member that is in poor health whom you will receive an inheritance or become a beneficiary of their life insurance or retirement and you need to file a bankruptcy, you should discuss this situation with your attorney as they can advise you and your family member of ways to protect that asset prior to filing the bankruptcy.
- Exemptions in Bankruptcy
- Will Your Assets Survive Bankruptcy?
- What is a Bankruptcy Trustee
- How Are Creditors Paid in a Chapter 13?
Cynthia T. Lawson is the Managing Partner of the Bond & Botes Law Offices location in Knoxville, Tennessee. She holds a Bachelor of Science from East Tennessee State University, and a Juris Doctorate from University of Memphis, Cecil C. Humphreys School of Law. She currently serves as a Mentor for the Moment in bankruptcy.Read her full bio here.