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An Inheritance Received After Filing Chapter 13 Bankruptcy Is At Risk

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A recent posting on a blog I read, The Bankruptcy Law Network, reminded me of how tricky the bankruptcy code can be and why it is good to have a lawyer handle your case should you decide to file. There are lots of pit traps to look out for. This one? What is considered “property of the estate.”

When you file bankruptcy, you create a “bankrupt estate.” Just like when you die and leave an “estate” to your heirs, this entity owns property, and what is included can depend on the type of bankruptcy you file. For example, the wages you receive from your job are not part of your estate in a chapter 7 but are in a chapter 13.

Is An Inheritance Part of Your "Bankrupt Estate"?

The post on this blog, however, talk about inheritances. If someone else dies and leaves an “estate,” and you are an heir, is your part of that person’s “estate” part of yours in bankruptcy, and as such, reachable by the trustee? Again, it depends on what kind of bankruptcy you file.

In a chapter 7 bankruptcy if you inherit anything within 180 days of filing your case, that is considered in the estate and can be sold by the trustee to pay your creditors, unless you can exempt it. The question is, what happens in a chapter 13?

Well, an appeals court in the Fourth Federal District, which includes our neighbors in Maryland, Virginia, and the Carolinas, says that anything inherited at any time during your case becomes property of your estate! This is potentially big, since a chapter 13 repayment plan can be anywhere from 3 to 5 years in length!

In the case heard by the court, the debtors had a plan whereby they were paying about 4 cents on the dollar to creditors when the husband found out he would be inheriting $100,000.

They notified the court, and the trustee sought to grab it to pay creditors. The court ruled for the trustee over the objections of the debtors, and that money went to pay debts to the extent it could not be exempted.

So What Does This Mean to Me in NJ?

The lesson to be learned here is that anything could be fair game for a trustee in a chapter 13 bankruptcy when it comes to assets you acquire during your plan. This could apply to inheritances, gifts, tax refunds and the like. Bear in mind three things, however:

  • Bankruptcy courts in New Jersey (3rd Circuit) are not bound by 4th Circuit rulings
  • State laws can vary as to someone's rights under an estate
  • Not all inheritances are created equal. If it is tied up in a trust, that can make a difference

So if you are contemplating filing bankruptcy, it is good to have an experienced attorney by your side to deal with these issues!

I Can Help!

If you live in the Gloucester County New Jersey area and are considering filing bankruptcy, feel free to call my office at 856-432-4113 or contact me through this site for a free consultation in my Woodbury office to discuss your case.

If you are looking for more information about bankruptcy, then download my free book,Top Questions People Ask About Filing Bankruptcy in New Jersey.

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