Inheritance in Chapter 7 and Chapter 13

Potential bankruptcy clients always respond with a puzzled look whenever I ask a question about the possibility of an inheritance in the near future. But it is a serious question that may have serious implications for some clients. As a Maryland Bankruptcy lawyer, I counsel my client about the two provision of the law that govern inhertances while in bankruptcy. First, Section 541 tells us what property belongs to the bankruptcy estate once you file your case.  Inheritances are covered by Section 541(a)(5) which states that property that the debtor acquires or is entitled to receive by bequest, devise or inheritance becomes property of the bankruptcy estate.  If a debtor inherits property within 180 days after filing, the trustee can get those assets to pay creditors. Therefore, if you file your case today and someone dies tomorrow leaving you some serious change then you may have a serious problem. You entire inheritance could be seized and used by the trustee to pay off your creditors. Obviously, this provision was aimed at stopping folks from abusing the bankruptcy process by rushing to file bankrutpcy to wipe away debts right before receiving an inheritance.

How about if I am in a chapter 13? Well, the Fourth Circuit recently gave us the answer to this question. InCarroll v. Logan, the Court stated that inheritances occuring duirng an active chapter 13 case are part of the bankruptcy estate. The authority for this came from Section 1306 which states that property of the bankruptcy estate includes everything that the debtor acquires AFTER the case is filed but before the case is concluded.   In the latter case, the debtors’ inheritance came in 3 years into the chapter 13 plan. As a result, Section 1306 give the trustee the authority to take the inheritance to pay off creditors or in the alternative the debtors had to amend their plan to pay the value of the inheritance to the trustee to pay off creditors.

I have assisted debtors to file chapter 7 cases when there was a potential for some inheritance primarily the proceeds of long standing litigation. The debtors in those instances weighed the burden of on going pressure from creditors versus the chance that the litigation could result in an inheritance during the 180 day period. If that happened, then creditors would have to paid first with any balance going to my clients. 

This goes to show how important it is that you have a knowledgeable bankruptyc lawyer and the need to answer all the questions asked of you in a forthright manner. With all th einformation at hand, you can make an informed decision about what is good for you and your family. 

This is just a brief overview of a complex issue. Always consult a lawyer before taking action.

Joseph K. Githuku


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s