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What Happens to an Inheritance After Bankruptcy?

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  • Written By: Marlene Garcia
  • Edited By: Daniel Lindley
  • Last Modified Date: 03 December 2016
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If someone receives an inheritance after bankruptcy, it generally becomes part of the bankruptcy estate and must be turned over to the bankruptcy trustee, although time limits apply for certain types of bankruptcy cases. When a debtor files bankruptcy that discharges all of his or her debt, an inheritance after declaring bankruptcy must be turned over if it occurs within six months of the filing date. For a person who declares bankruptcy to reorganize debts and set up a payment plan, the time limit does not apply, and all assets received from a will are used to repay creditors.

Under US tax laws, it is illegal to hide assets, including money received as an inheritance after bankruptcy. Even if distribution of the estate is not finalized within the 180-day limit, it still becomes part of the bankruptcy estate and must be used to offset debt. Estate taxes might also be due before assets are distributed to beneficiaries of a will. Federal estate laws require estate taxes if the inheritance is above a certain amount. State laws can vary by region.

In a chapter 7 bankruptcy, the debtor’s assets are sold and the proceeds used to pay outstanding debts. If the debtor receives an inheritance within six months of filing for relief, he or she must disclose that money to the trustee handling the case. Failure to do this constitutes fraud punishable by imprisonment.

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A chapter 13 bankruptcy reorganizes debts and permits the debtor to pay a certain percentage of what he or she owes to creditors. If he or she receives an inheritance after bankruptcy in this type of filing, it must also be disclosed, even if it occurs after 180 days and the bankruptcy has not been discharged. Typically, the money inherited raises the percentage of payments the debtor is making.

Bankruptcy allows someone burdened by excessive debt to make a fresh start. Sometimes an illness or unemployment forces a person to file bankruptcy. Some assets are exempt from seizure by the bankruptcy court, and can include the filer's primary home. Certain obligations cannot be relieved by claiming bankruptcy, such as child support, alimony, federal or state taxes owed, and some student loans.

One exception to the law governing inheritance after bankruptcy might be claimed if the person who died signed a pay on death provision. This usually applies to bank accounts set up with specific language. A bankruptcy attorney and the bankruptcy trustee can determine if assets obtained in this manner are exempt or part of the bankruptcy estate.

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