Any asset you possess needs to be disclosed during the bankruptcy process. That also means that any inheritance you receive needs to be mentioned to the court. If you inherit money within a certain timeframe, a New City bankruptcy attorney from our firm can tell you what should be done and if it will have to be used to pay off debts.

Do I Tell Creditors If I Inherit Money?

If you inherit money within 180 days of filing for bankruptcy, you have to make that known. The usual process is notifying your bankruptcy trustee so that they can figure out if anything about your bankruptcy plans needs to change.

It’s important to mention that when you receive the money is not important. The date the deceased person dies is considered the date you inherit the money, even if you will have to wait for a little while before it is released to you.

Understanding the Bankruptcy Estate in New York

When you file for bankruptcy in New York, a separate legal entity will be established, known as a “bankruptcy estate.” Essentially, this will automatically encompass property like:

  • Almost all personal assets held at the time of filing
  • Your current and active legal rights to property
  • Certain property obtained post-filing in accordance with strict look-back rules

Whether you pursue liquidation or reorganization, your assigned bankruptcy trustee is legally tasked with collecting non-exempt assets from this estate to pay your creditors.

The 180-Day Rule for Inheritances

Federal bankruptcy statutes utilize a strict look-back period to determine if assets acquired after filing should be included in your bankruptcy estate. Essentially, this dictates that:

  • If a benefactor passes away within 180 days of the filing date, the inheritance will belong to the bankruptcy estate
  • The timeline is ultimately dependent on when you become legally entitled to the property (typically the date of the death), not when probate finishes, or the money is transferred to you.

Will I Have to Spend Any Money I Inherit?

Unfortunately, it is likely that any money you inherit will go towards paying off your debt. Exactly how it affects your case depends on which chapter you filed under.

Impact on Chapter 7 Liquidation Cases

If you file for Chapter 7 bankruptcy, whatever money you inherit within the 180-day window will be considered one of your assets and could be liquidated and seized by the trustee to pay down debts. You might be able to use an exemption for it, but it’s not a sure thing.

Impact on Chapter 13 Reorganization Plans

For those filing Chapter 13 bankruptcy, the inheritance is likely to affect your payment plan with your creditors. In this type of bankruptcy, filers make a three-to-five year payment plan that they can afford.

Even if your inheritance arrives years after you have filed your bankruptcy case, coming into this money can still impact the terms of your plan, because:

  • The trustee will treat the inheritance as a considerable spike in your disposable income
  • The trustee may not directly seize the funds, though creditors may request increased payment allocations
  • You may have to pay more as a result of a mandatory increase in Chapter 13 payment plans

The creditors may not get paid back completely, but they get a significant chunk of what they’re owed. If they know about an inheritance, it’s likely that they’ll want more money from you. You have more assets, so you’ll have to pay more.

Full disclosure of any potential inheritance to your legal counsel and the bankruptcy trustee is mandatory for establishing a sound legal strategy.

What If My Spouse Receives Money?

When your spouse is the one to inherit money, you need to make sure that it is not mixed with your shared funds. Do not deposit it in a joint bank account or do anything else that can make it look like an asset that you and your spouse share. As long as you do that and you are filing for bankruptcy on your own, your spouse’s inheritance should not be touched.

What If I Hide My Inheritance?

Obviously, it’s not ideal to receive an inheritance during the bankruptcy process. However, trying to hide such an asset is a terrible idea. Your case will probably be dismissed without your debt being addressed, but that could be the least of your worries. You could face charges of fraud or perjury as well.

Talk to a Bankruptcy Attorney

If you have any questions about the bankruptcy process, we want to hear from you. If you have received an inheritance after filing for bankruptcy, it is in your best interest to contact an experienced Rockland County Bankruptcy Attorney at The Lauterbach Law Firm for guidance.

Our dedicated legal team is ready to assist you with the following crucial safeguards:

  • Assessing if specific legal exemptions can protect a portion of your inherited funds
  • Ensuring all required bankruptcy forms and schedules are accurately amended
  • Preventing devastating legal penalties, fraud allegations, or case dismissals

Contact the Lauterbach Law Firm and ask to schedule a consultation with our team. We’re ready to help you figure out if this is your best option for a fresh financial start and to develop a unique plan that gives you and your loved ones peace of mind.