Inheritance During Chapter 13 Bankruptcy

Just as debts incurred after a case is filed are not subject to the bankruptcy discharge, so is property acquired after bankruptcy not at risk of turnover in a Chapter 7 case. Essentially, whatever you own is used to pay whatever you owe, and the rest is discharged at the end of the Chapter 7 case.

One exception to this general rule is an inheritance. Since bankruptcy attempts to balance the rights of the debtor with the rights of creditors, it would not be fair to allow a debtor who is expecting an inheritance to file bankruptcy, discharge all of his debts, and then collect a fat inheritance. Consequently, Congress enacted section 541(A)(5)(a) of the Bankruptcy Code which states that an inheritance can be used to pay creditors (i.e. included in “property of the debtor’s estate”) if the debtor acquires or becomes entitled to acquire the inheritance within 180 days after filing bankruptcy. In other words, if your aunt Bessie dies within 6 months of your bankruptcy filing, the trustee could take the inheritance to pay your creditors, even after your case is closed.

While the above is the rule for Chapter 7 cases, it is different for Chapter 13 debtors. In a Chapter 13 case, the debtor is expected to contribute whatever he reasonably can to pay his creditors. In the case of an unexpected inheritance during a Chapter 13 case, the debtor must pay the inheritance into the plan, minus any exemptions. Yes, even if the right to the inheritance arises more than 180 days after the bankruptcy filing date.

The Fourth Circuit Court of Appeals recently made this issue clear when it decided the case of Carroll v Logan. In Carroll, the debtors filed bankruptcy, then received an inheritance of $100,000 three years later during the repayment period of their Chapter 13 case. The bankruptcy trustee moved to modify their plan and pay the $100,000.00 to creditors. The debtors objected, arguing that section 541 states that inheritance property is “property of the estate” only when the right to acquire it occurs within 180 days of the bankruptcy filing date. In this case the right to the inheritance was well outside that 180 day limit.

The trustee countered that section 1306 of the Bankruptcy Code expands section 541 to include property acquires after commencement of the case but before the case is closed, dismissed, or converted to a case under a different chapter. The bankruptcy court and the appellate courts agreed with the trustee, and approved the order to pay the $100,000.00 inheritance into the plan.

Interpreting the Bankruptcy Code is challenging work, even for skilled professionals. That is why it is critical to hire counsel for your bankruptcy case who is committed to staying informed of trends and changes in the bankruptcy world.