Written by attorney Mark B Chernev

How Will an Inheritance Affect my California Bankruptcy?

If you are contemplating bankruptcy or are in a bankruptcy proceeding, you have a legitimate concern regarding any inheritance that you may be anticipating, whether it be a valuable family heirloom or sizeable sum of money. In general, an inheritance is considered an asset of the estate and can be used by the bankruptcy trustee to satisfy your debts. However, whether or not the inheritance is subject to forfeiture to the bankruptcy estate depends in large part on timing and the chapter under which you have filed or will file.

Chapter 7

Under a Chapter 7 bankruptcy, if you become entitled to an inheritance within six months (180 days) of filing for bankruptcy, the inheritance can be seized by the bankruptcy trustee and contributed towards the sum of money owed to creditors. The key date is the date on which you become “entitled" to the inheritance, in other words, the day on which your loved one passed away. Even if you do not receive the inheritance until months or years later, it will be subject to forfeiture to the bankruptcy estate if that right accrued during the 180-day period.

Chapter 13

Given the nature of a Chapter 13 bankruptcy proceeding, the rule in this case is slightly different. A Chapter 13 bankruptcy is essentially a work out plan that allows you to continue paying on debts owed over a period of time. As such, if you become entitled to an inheritance anytime during the repayment period, the value of the inheritance may be applied to calculate the amount you must pay into the Chapter 13 payment plan, even if you become entitled to the inheritance after the expiration of the 180-day period.

Steps You Can Take

The good news for debtors is that there are options to help you avoid the harsh consequences that may ensue if you receive an inheritance during or prior to filing for bankruptcy. If you inherit a sum of money prior to filing for bankruptcy, it is possible for you to spend it in such a way as to avoid having it be considered part of the bankruptcy estate. A trustee will take into consideration how you spent the money and will not likely take issue if the money is spent on necessities, including health-related costs, household goods or furnishings, and necessary home repairs. If, however, you purchase an item, such as a vehicle, boat, motorcycle, house, or piece of art, which has a lasting value or increases in value, the trustess is likely to seize the item.

In the State of California, there is additional relief if you are attempting to protect your inheritance from being forfeited during bankruptcy. California is one of the few states that has opted out of the federal bankruptcy exemptions. One of the results is that the State of California has a "wild card" exemption. This allows you to exempt over $21,000 worth of personal property, which will not be considered part of your bankruptcy estate. This is a particularly appealing option if you have little home equity or other property you would like to exempt.

There may also be additional avenues that may allow you to keep your inheritance. In anticipation of an inheritance, you may suggest that a spendthrift trust be established, naming you as the beneficiary. This is preferable to a will or other type of trust account, since creditors do not have access to assets placed in a spendthrift trust. As a last resort, it is possible for you to decline to accept the inheritance. Particularly for valuable family heirlooms or property that has been in the family for years, people would generally rather see it go to another family member rather than fall into the hands of creditors.

Qualified Legal Representation

To learn more about your bankruptcy options, explore our Bankruptcy Resources page. To schedule a confidential, no cost bankruptcy consultation, contact The Chernev Firm today. Let our experience guide you in the right direction.

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