By Ryan C. Wood
If you become entitled to receive an inheritance during your bankruptcy case the inclusion of the inheritance into your bankruptcy estate depends on what chapter of bankruptcy protection you are filing under. Becoming entitled unfortunately someone close to you passed away after your case was filed. If you are entitled to receive an inheritance within 180 days of filing a Chapter 7 bankruptcy case the inheritance will be included into your bankruptcy estate. Please note this is if you are entitled to receive the inheritance within this time frame. This means that someone passes away and leaves you with an inheritance. You must contact your bankruptcy lawyer and/or the Chapter 7 trustee and inform them you have become entitled to an inheritance. It does not mean that you actually have to receive this inheritance during this time frame as a lot of times it takes at least several months or even years to actually receive the inheritance. If you are entitled to receive the inheritance 181 days after the filing of your Chapter 7 bankruptcy petition it is not part of your bankruptcy estate and you can receive the inheritance free and clear from your creditors pursuant to the discharge in your Chapter 7 case.
What About in a Chapter 13 Bankruptcy Case?
So what happens if you are entitled to receive an inheritance during a Chapter 13 bankruptcy case? Different jurisdictions may have different outcomes so you need to consult with a bankruptcy attorney in your area to see how your inheritance will be treated. In a recent Fourth Circuit appellate case, Carroll v. Logan (In re Carroll), No. 13-1024 (4th Cir, October 28, 2013), the court decided that inheritances acquired after the 180 day period but before the bankruptcy case is closed becomes part of your bankruptcy estate.
In the Carroll case, Mr. & Mrs. Carroll filed for Chapter 13 bankruptcy protection in February 2009. They were complying with the terms of their Chapter 13 plan and made the Chapter 13 payments. In December 2011, Mr. Carroll’s mother passed away. Mr. & Mrs. Carroll notified the court in August 2012 that Mr. Carroll was anticipating an inheritance of about $100,000. The Chapter 13 trustee moved the court to modify the Carrolls’ Chapter 13 plan to include the inheritance. The bankruptcy court agreed with the trustee and the Carrolls’ appealed the case to the 4th Circuit. The 4th Circuit states that 11 U.S.C 541(a)(5) includes interest in property that bankruptcy filers are entitled to acquire within 180 days (of the filing of the bankruptcy case) received by bequest, devise, or inheritance. The court then went on to state that 11 U.S.C. §1301(a) expands §541 by indicating that all property indicated in §541 that is acquired after the case is filed but before the case is closed, dismissed, or converted to a case under Chapter 7, 11, or 12, whichever occurs first is also part of the bankruptcy estate. The 4th Circuit concluded this meant that since the Chapter 13 bankruptcy case was not closed, dismissed, or converted, the inheritance was part of the bankruptcy estate and therefore can be used to repay the creditors.
We understand that the passing of a loved one is very traumatic and may sometimes be very unexpected. If you are filing for bankruptcy you should know if you are listed as a beneficiary in anyone’s will, trust, life insurance policy, or other instrument. The inheritance you may potentially receive may be in jeopardy depending on your circumstances.