Inheritance and Bankruptcy
When a bankruptcy debtor inherits money from someone who dies within 180 days of the date the debtor filed bankruptcy that money becomes part of the debtor’s bankruptcy estate. The inherited money that becomes part of the bankruptcy estate is used to pay your creditors. This is true even if you have received a discharge and your Chapter 7 bankruptcy case has closed.
For instance, if you file a Chapter 7 bankruptcy on April 1, and your great aunt dies on September 28 (within 180 days of the bankruptcy filing date), any money you receive from your great aunt’s estate must be turned over to the bankruptcy trustee. It does not matter when you receive the money or when your case was discharged. You might receive the inheritance years later, and it must be turned over to the bankruptcy trustee for payment to creditors. You may be charged with bankruptcy fraud (a federal crime) if you fail to inform the trustee of your inheritance or turn over the money.
If the trustee receives inherited money, your case will be reopened and a bankruptcy estate is formed. Notices to creditors are sent and the trustee will distribute the funds to creditors. In some cases you will be able to keep some of the money, and in other cases some of the funds may be returned.
Inherited property is treated the same as cash. If you receive a car or a family heirloom, the property must be turned over to the trustee. In some cases you may be able to exempt inherited property or the trustee may consider the value of the inheritance too small or burdensome to liquidate and distribute.
If you are considering bankruptcy and are aware of a significant chance of someone leaving you inheritance money, speak with your attorney. There are options to avoid turnover including rewriting the will to cut you out, or setting up a spendthrift trust. A spendthrift trust cannot be reached by creditors. Consult with an attorney to properly create a spendthrift trust or rewrite a will. There is nothing illegal or immoral about estate planning and your loved one may prefer leaving money to you rather than your creditors.
Is An Inheritance Part Of A Chapter 13 Bankruptcy Estate?
Facts: Client is in the final few years of a 15% Chapter 13. He inherits ½ interest in a home worth about $85,000 and $50,000 in stocks. He only has about $20,000 of total unsecured debt left in his bankruptcy. His Chapter 13 payments are only $200 per month. The Trustee filed a motion to increase his plan to 100%. Result: Debtor sells stock and pays off his Chapter 13 at 100%.
At first glance, the bankruptcy statues would lead you to believe that any inheritance acquired by the debtor at least 180 days after the filing is the debtor’s property. Section §541 describes property of the estate and mentions only those inheritances acquired within 180 days after filing a petition – 11USC §541(a)(5)(A).
However, Section §1306(a)(1) states that property of the estate includes everything listed in §541, and all property acquired by the debtor after the filing of the petition but before the case is closed. Compare that to Section 1327(b) which states “confirmation of a plan vests all of the property of the estate in the debtor”. Further, §1327(c) says that property vesting in the debtor is “free and clear of any claim or interest of any creditor provided for in the plan” (11USC §1327(c)).
Basically, in order to reconcile §1306(a)(1) and §1327(b) and (c), and to capture newly acquired property for the purposes of the bankruptcy estate, Courts rely on §1325(b) –the plan must provide that all of debtor’s “disposable income” be applied to make payments, and then §1329 is used as authority for the Trustee to modify a debtor’s plan after confirmation. The basic argument is that although property vests within the Debtor pursuant to §1327(b), a windfall will be captured for the creditors on a motion to modify under §1329. Is an inheritance this late into a Chapter 13 “disposable income” under §1325(b)? I would think that property excluded by §541, or property otherwise exempted from the estate would not be, but case law seems to result in the opposite analysis.
A few debtor friendly cases indicate use of the ‘best interest of the creditors’ analysis under 11 USC §1325(a)(4) – basically are the creditors better off than they would be under Chapter 7? And in Chapter 7, creditors would most likely not be entitled to an inheritance received over 180 days past the filing date. However, in spite of the Code, Courts have increasingly held that the Chapter 13 estate includes gifts, inheritances, and windfalls that are acquired after the filing. There are several cases where acquiring property (like lottery winnings – see In re Koonce, 54 BR 643 (Bankr DSC 1985), law suit settlements, insurance settlements, inheritances– see In re Nott, 269 BR 250, 257, 258 (Bankr. MD Fla 2000) and In re Euerle, 70 BR 72 (Bankr DNH 1987), large gifts or loans – see Doane v Appalachian Power Co, 19BR 1007 (Bankr WD Va 1982)) has forced Debtors to pay more to their creditors than originally planned for in the Chapter 13. In a recent case in the Western District of Kentucky, a Motion by filed the Trustee resulted in a debtor turning over $205,431.43 to complete his plan at 100% because he won the lottery.
I imagine basic public policy concerns might be behind most of these Court rulings, but isn’t a Chapter 13 supposed to give the debtor a fresh start? It seems like under the Code, any property acquired after the filing should be property of the debtor giving him complete right to control the property. And if so, why is it considered disposable income? Are real property and stocks considered “disposable income”? Why is a debtor penalized for falling into good fortune after filing a Chapter 13? After all, this is not property that was committed to funding the plan. Shouldn’t post-petition acquisitions be used for post-petition obligations? What if Debtor’s case was converted to Chapter 7? Then the property would not be part of the estate – he could keep the inheritance and the creditors wouldn’t even get their promised 15%. Would the conversion be considered in “bad faith” after the Trustee’s motion has already been filed? Hmmm.