The bankruptcy law has some specific rules about inheritance and a debtor’s bankruptcy case. In a nutshell, if a debtor receives an inheritance within 180 days of filing bankruptcy, the bankruptcy trustee will take the inheritance and use it to repay creditors. Some debtors expecting the death of a family member may be tempted to delay a bankruptcy filing until after they receive their inheritance or to forgo bankruptcy completely if they believe their inheritance can cover their debts. However, there are a few things debtors need to consider before using this bankruptcy strategy:
- How urgent is your need to file bankruptcy? If you are facing creditor lawsuits and wage garnishments, delaying a bankruptcy filing based on the chance that you may receive an inheritance may not be the wisest decision. Even if you forgo bankruptcy in hopes of receiving money from an inheritance, remember that the money could become embroiled in legal challenges in probate court. You may not get what you expected. Or, you may not get anything at all.
- Even if a debtor receives an inheritance, it may not be enough to pay their debts and they may need to file bankruptcy anyway. Unfortunately, if you received an inheritance before filing bankruptcy, that money may impede your ability to file Chapter 7 bankruptcy. With cash from an inheritance, the bankruptcy court may perceive the debtor as wealthy enough to file Chapter 13 bankruptcy or to avoid bankruptcy all together.
- It may be better to file bankruptcy immediately despite the belief that you may receive an inheritance soon. If you receive the inheritance 181 days or more after you file bankruptcy your creditors can’t touch the money. In essence, you would have discharged your debts in bankruptcy and received your inheritance, a win-win situation by any measure.