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Getting An Inheritance And Bankruptcy In Indiana

November 1, 2019
By Steven P. Taylor, J.D.
Founder of the Law Offices of Steven P. Taylor P.C.

If you become entitled to receive an inheritance after you file for bankruptcy in Indiana, it may be part of your bankruptcy estate. In a Chapter 7 bankruptcy case, it can become part of the assets that the Chapter 7 bankruptcy trustee can take unless it’s protected by an exemption. In a Chapter 13 case, receiving an inheritance does become part of the bankruptcy estate and may increase the amount you have to distribute to your unsecured creditors.

Becoming Entitled To Inheritance Within 180 Days of Filing Bankruptcy

With respect to a Chapter 7 bankruptcy, whether or not an inheritance becomes part of your bankruptcy estate depends on the timing of the inheritance. If you become entitled to the inheritance (not receive) within 180 days after you filed, the inheritance becomes the property of the Chapter 7 bankruptcy estate. 11 U.S.C. §541(a)(5)(A).  You should immediately advise your attorney and are required to notify the Chapter 7 Trustee and Court.  As you may recall, when you file for Chapter 7 bankruptcy, a trustee is appointed to ascertain whether you have assets which the trustee can liquidate and use those funds to pay your creditors.  Some of the debts get paid and the remainder will get discharge, leaving you free to move on from crushing debt.

Likewise, if you become entitled to the inheritance (not receive) within 180 days after you filed, the inheritance becomes the property of the Chapter 13 bankruptcy estate. 11 U.S.C. §541(a)(5)(A). With respect to a Chapter 13 bankruptcy, the consequences of becoming entitled to receive an inheritance also depend on the proposed distribution to unsecured creditors in your plan.   In a Chapter 13 Plan, you must provide a dividend to your unsecured creditors equal to the amount they would receive as if you had filed Chapter 7.  If your dividend is now insufficient, you will need to modify your plan to increase the dividend.  This can be done by an increase in your monthly payments or by devoting a portion of the inheritance when received to the Chapter 13 Trustee to satisfy this requirement.

Potentially losing an inheritance can be an emotionally upsetting time; however, remember that you must be completely honest and disclose all debts and assets to the court.   If the court finds that you misled the court about an inheritance, the Court could impose monetary penalties, dismiss your case and still be required to give up all or some of your inheritance.   Potentially, your actions could lead to an investigation by the government for fraud, which can lead to hefty fines or incarceration.  Therefore, if you do become entitled to inherit within 180 days of filing for bankruptcy, you must disclose that fact to the court and trustee by amending your bankruptcy Schedule B, and maybe C.

  • You must amend Schedule B and disclosure your interest in underlying assets of the inheritance and an estimated value. If you are claiming the property as exempt in some fashion, you must also amend Schedule C.

As may be gathered, the trigger is that you have become entitled to the inheritance.  It doesn’t matter when you actually collect the inheritance, even if it is after your bankruptcy is supposed to be over. The date that matters is the date entitled to the inheritance become effective (i.e., the date the decedent passed away).

Becoming Entitled to Inheritance After 180 Days of Filing Bankruptcy

With respect to a Chapter 7 bankruptcy, If you become entitled to an inheritance more than 180 days after you file, the consequences are significantly different. The inheritance is not part of your bankruptcy assets.  Therefore, a Chapter 7 trustee cannot claim the inheritance and try to liquidate it for the benefit of your creditors.  It is all yours.

With respect to a Chapter 13 bankruptcy, however, the Court and Chapter 13 Bankruptcy Trustee may still require to amend your plan due to becoming entitled to an inheritance, even if more than 180 days have passed since you filed.  This is because under 11 U.S.C. §1306(a)(1), your Chapter 13 bankruptcy assets include all assets acquired until your case is closed, dismissed or converted.  While technically, you are not required to pay an increased dividend to your unsecured creditors by reason of becoming entitled to this inheritance; the Chapter 13 Trustee will require you increase the dividend to the unsecured creditors by some amount.  (By the way, this can happen when your income and assets increase for any reason during the Chapter 13 bankruptcy repayment plan period, from three to five years.)

Steps to Take to Keep Inheritance

If you are aware that you are the beneficiary of a will of a person who may be passing within 180 days of your anticipated bankruptcy filing date, you may want to suggest that your entitlement be left to you as a beneficiary of a spendthrift trust.  Some courts have held that a true spendthrift trust is not part of the bankruptcy estate.  Contrary to conventional wisdom, spendthrift trusts are not solely for the well-to-do.  Having this discussion with a loved ones who want you to have something with they pass can honor their wishes and allow you to avoid the hassle of dealing with bankruptcy trustee in a bankruptcy proceeding.

Find an Attorney

If you file for bankruptcy in Indiana and receive an inheritance, bankruptcy laws require that you disclose the new assets to the court and trustee. If you anticipate that you may inherit property while in bankruptcy that you really want to keep, you may wish to discuss your case with an experienced Indiana attorney to determine how to protect your inheritance from bankruptcy or how an inheritance will be treated during the bankruptcy.

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