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Will Receiving an Inheritance Affect My Bankruptcy Proceeding?


A big money gift, especially while you’re facing a financial crisis, seems like it should be a good thing. However, when you’re going through a bankruptcy, you may be concerned that the inheritance left as a parting gift from a loving family member would quickly be absorbed by creditors. If you have begun the process of filing for bankruptcy, but have received an estate gift or believe you soon will, speak with your attorney as soon as possible to allow her to plan for this event, in order to offer you the best possible outcome to promote your financial interests.

Depending on the form of bankruptcy you file, the manner in which an inheritance will be treated by a bankruptcy court will vary. As a general rule, a gift of money through a will, or money received as a benefit from a life insurance policy, will be treated as available funds to pay off creditors. In either case, there may be ways to use your exemptions to protect a gift, which your attorney can assist you in determining.

Under a Chapter 7 filing, any inheritance received within 6 months of the date you filed has to be reported to the bankruptcy trustee for inclusion in your bankruptcy estate, even if your bankruptcy file has been closed. It is possible that, if the amount isn’t large, your bankruptcy trustee will not feel that it is worth the additional expense of reopening your file to include the sum in your estate. However, no matter the amount, you must still report it to your bankruptcy attorney and to the court.

If you received an inheritance after filing for bankruptcy under Chapter 13, there is no time limit for inclusion in the estate, as there is under Chapter 7; any inheritance or life insurance benefit will be considered disposable income, available to repay your creditors. If the gift is substantial enough, you may be able to dismiss your Chapter 13 bankruptcy filing altogether and use the gift to pay off your debts, especially if your attorney can assist you in negotiating informally with creditors to reduce the total debt you owe. In other cases, your attorney may decide that changing your filing from a Chapter 13 to a Chapter 7 would allow your inheritance to be protected.

Depending on the state laws which apply to the inheritance, you may be able to disclaim an inheritance, allowing it to be distributed among other heirs. If you have some reason to know in advance that you should expect to inherit a gift, you may wish to look into the investment of those funds into a spendthrift trust, protecting them from the bankruptcy court. These are questions which a skilled attorney could investigate on your behalf.

If you are considering bankruptcy and would like skilled legal assistance in filing your claim or exploring other options, contact Bowling Green’s experienced bankruptcy attorney Lanna Kilgore for a consultation on your case, at 270-846-3700.

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