If you're considering Chapter 7 bankruptcy protection, one of your biggest concerns is probably how you can protect what assets you do have. Is one of these an inheritance you've received or expect to receive soon? If so, there is an added layer of complexity to your Chapter 7 case. To help you understand your rights and responsibilities regarding this inheritance, here are a few important steps to take.
1. Decide If You Want to Protect It. How much is the inheritance and what effect could it have on fixing your finances outside of bankruptcy? A large bequest could render bankruptcy unnecessary. However, if it won't solve your problems, it may be better to try to protect it rather than spend it on dischargeable debts. This is a personal decision, but it informs all your later decisions.
2. Understand the Timing. In general, any inheritance that is due to you as of the date of filing your case is part of the bankruptcy estate. Keep in mind that this means the date of the person's passing — not the date you actually receive the inheritance. These could be months or years apart. In addition, the trustee may be able to include inheritances received up to 180 days after filing your case.
3. Use Bankruptcy Exemptions. The Chapter 7 bankruptcy exemptions allow debtors to claim a waiver on liquidation for certain types and amounts of assets. These exemptions vary by state, but they often include things like real estate, vehicles, bank accounts, retirement accounts, and household goods up to specific values. You may also be able to include your inheritance in a wildcard exemption.
4. Don't Make Drastic Changes. The bankruptcy court understands that you may need to use funds on hand before bankruptcy in order to continue meeting your daily needs. But it scrutinizes sudden, drastic changes in behavior to determine if you could have committed fraud. So don't rush out to spend your inheritance, pay a single creditor preferentially, or make huge contributions to exempt accounts.
5. Focus on the Big Picture. It's not always possible to protect your inheritance if the timing coincides with bankruptcy. As you work with your lawyer to find the best options, keep in mind that the important part of the process is that you will receive needed financial relief from this bankruptcy. It will improve your life and your finances — perhaps more so than the inheritance could have done.
Where to Learn More
The first step in protecting anything that could be subject to Chapter 7 liquidation is to meet with an experienced bankruptcy attorney in your state. Make an appointment with a local Chapter 7 bankruptcy attorney today to learn how they can help you.