Our office speaks to many Georgians every day who contact our attorneys to discuss the possibility of filing for bankruptcy.  Filing for bankruptcy may be a good solution for a person whose income cannot keep pace with the person’s debts – resulting in a precarious financial situation that several of our neighbors have found themselves in during these difficult economic times.

While filing for bankruptcy certainly results in significant benefits in many cases, there are also potential drawbacks and disadvantages that should be closely examined and thoroughly understood before filing the bankruptcy application.

One of these potential drawbacks is how the bankruptcy law deals with inheritances that are received by people who are going through the bankruptcy process.  An inheritance is any personal or real property – including money – which a person receives from another person’s estate when that person dies.  Bankruptcy law treats inheritances differently depending on whether the person who received the inheritance is filing for Chapter 7 bankruptcy or Chapter 13 bankruptcy.

What Happens if I Receive an Inheritance After I Filed My Bankruptcy Application?

If you file Chapter 7 bankruptcy and you receive your inheritance after you filed your case, the inheritance may become part of your bankruptcy estate – meaning that the trustee who is assigned to your case could use the inheritance to help pay off your creditors.

If you file Chapter 13 bankruptcy and you receive your inheritance after filing the case, the inheritance could likely increase the amount you have to pay to your creditors under your Chapter 13 repayment plan, as the inheritance provides you with access to additional income.

You may think that if you have already filed your case, how would the bankruptcy court even know about the inheritance?  You are required by law to inform the court that you have received an inheritance if you receive it within 180 days after filing your case.  The failure to do so would result in significant penalties and consequences for you and your bankruptcy case.

If you received your inheritance more than 180 days after you filed your bankruptcy application, there may be a different result.  If you filed Chapter 7 bankruptcy, the inheritance is yours and the trustee cannot use it to satisfy any of your creditors.  However, if you filed Chapter 13, the bankruptcy judge may still include the inheritance in your repayment plan even if you received it more than 180 days after filing your original bankruptcy application.  The judge has the power to do this because your Chapter 13 repayment plan may be amended if your income increases during the repayment period for any reason.

What if it’s My Spouse – Not Me – Who Receives the Inheritance?

If you and your spouse did not file a joint bankruptcy application and your spouse receives an inheritance, then the bankruptcy trustee or judge cannot claim any of that inheritance for the bankruptcy proceedings because it is not considered your property.  However, if your spouse commingles the inheritance with your assets, such as by using the money to buy you a fancy watch or a new car, the judge or trustee could take the position that the watch or new car is now part of your bankruptcy proceeding and may be sold to help satisfy your debts to your creditors.

It may be possible to avoid the inheritance problems altogether by working with a knowledgeable bankruptcy attorney and debt manager who can help you and your family structure your property in such a way as to avoid it passing into a bankruptcy estate.  These important issues can be very complicated and it is highly recommended that you consult with an experienced attorney who can help you prepare for and handle these issues.