When you declare bankruptcy, your current assets become the property of your bankruptcy estate subject to certain state and federal exemptions. These exemptions may shield certain assets from your creditors. The bankruptcy trustee will oversee the legal disposition of your assets and payment of any creditors with the proceeds. Whether or not creditors are entitled to the proceeds of an inheritance received after you declared bankruptcy depends on two factors. One consideration is the date that you are entitled to receive the money, and the second is whether the money is covered by an exemption. These factors will determine if the inheritance is part of your bankruptcy estate.
180-Day Rule
If you are entitled to receive an inheritance within 180 days of your bankruptcy filing date, the proceeds are considered part of your estate. It does not matter when you actually receive the money; the date of the entitlement is the key factor. A common scenario is the death of a loved one, who has provided for you in a will. The decedent’s estate may take several months to probate, which delays when you actually receive the money or other asset. The date your loved one died is the day you are entitled to receive the inheritance not the actual date months in the future when you receive the gift. If the filing date of the will is within 180 days of your bankruptcy filing, the newly acquired asset is considered part of your estate. In Chapter 7 bankruptcy cases, the proceeds from the inheritance will be used to pay creditors. The inheritance, even if received 180 days after filing, may require restructuring of the court approved Chapter 13 bankruptcy repayment plan if the money is received during the repayment period. Congress passed this 180-Day Rule, to prevent people from declaring bankruptcy in order to protect an inheritance. It is also illegal to conceal assets from creditors. An inheritance to which you are entitled more than 180 days after your bankruptcy filing is usually free from creditors.
Exemptions
If the inheritance does become part of your bankruptcy estate, the proceeds are subject to any exemptions to which you may be entitled in accordance to bankruptcy laws and regulations. These exemptions, such as a spendthrift trust, may shield a portion or the entire amount of the inheritance. Once all your debts have been settled, any remaining funds are yours to keep.