Inherited Money in Bankruptcy
One question that many potential bankruptcy filers have is how the bankruptcy court handles inherited money and money that bankruptcy filers expect to receive in the months after their filing. The answer depends on a few variables. Here’s a look at some of them.
- The 180-day rule. One of the most important rules about bankruptcy and inheritance is that funds inherited within 180 days (or about six months) of the filing of a bankruptcy petition are generally considered to be part of the bankruptcy estate. This means that the bankruptcy court has the right to use those funds to repay creditors, pay court fees or do anything else it deems appropriate.
- Date of death. In the case of money inherited from a deceased person’s estate, the date of death will be taken into consideration. If the person died within the 180-day window, then the funds generally go to the bankruptcy estate, even if the filer doesn’t receive them until some time later.
- Type of inheritance. Another factor bankruptcy courts consider is how a person inherited money. Depending on laws in your state, the court might treat an actual will differently than another type of contract designating you as heir to certain money or property. A bankruptcy lawyer in your state can help you figure out how the court is likely to treat your expected inheritance.
- Exemptions. In some states, inherited property might be protected by bankruptcy exemptions. In certain cases, even if an inheritance falls within 180 days of a bankruptcy filing, the filer may be able to keep the inherited property.
- Bankruptcy fraud. It’s important to note that filers must report any expected inheritance on their bankruptcy petitions. If a filer tries to lie about or conceal inherited assets, the court could convict him of bankruptcy fraud, which is punishable by a serious fine and up to five years in jail.
If you have reason to expect that you will inherit money or assets in the near future, it’s a good idea to start thinking now about how you plan to use that money. While debt repayment is one option, it’s not the only one.
Consider speaking with a financial adviser about your options for setting up an emergency fund, negotiating your debts, and taking money management or investment classes. If you have debt, taking advantage of an influx of cash to improve your overall financial system may be more effective than simply making a one-time debt repayment.
Alternately, if you’re expecting an inheritance and wondering whether or not filing bankruptcy makes sense for you (either now or later), you may want to seek the counsel of a bankruptcy attorney.
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