The bankruptcy process is designed to give individuals a clean slate, freeing them from overwhelming financial burdens. However, inheriting money or assets while a bankruptcy case is pending raises key concerns: Can creditors claim the inheritance? Can you keep any of it? Does the date of death matter? The impact of an inheritance depends on the type of bankruptcy filed, the timing relative to the filing date, and available legal exemptions. For further information, please continue reading and consult an experienced Rockland County Bankruptcy Attorney.

What is the Critical Role of Inheritances in a New York Bankruptcy Case?

When initiating a bankruptcy filing in New York, you create a “bankruptcy estate,” which is a distinct legal entity comprising nearly all your assets and legal rights. Whether you file Chapter 7 or Chapter 13, the assigned bankruptcy trustee is responsible for gathering non-exempt assets and distributing them to your creditors in compliance with legal requirements.

The scope of this estate is not limited to the property you hold on the exact date of filing. Crucially, federal bankruptcy law dictates that certain property acquired after the filing date must also be included, with inheritances being a prime example subject to strict time limits.

For inheritance purposes in bankruptcy, the key date is when you become legally entitled to the property, which is typically the date of the person’s death, not the later date when the estate is finalized through probate or when you physically take possession of the funds.

Bankruptcy statutes establish a look-back window. If the deceased person passes away within 180 days following the date you filed for bankruptcy, the resulting inheritance, or your legal right to it, must be included in your bankruptcy estate.

What is the Impact of an Inheritance on Different Chapters?

Receiving an inheritance while you are in bankruptcy changes things, and exactly how it affects your case depends on which chapter you filed under. The impact on different chapters:

  • Chapter 7 (Liquidation): An inheritance falling within the 180-day window becomes property of the estate and, to the extent it exceeds available exemptions, can be seized by the trustee to pay creditors.
  • Chapter 13 (Reorganization): Even if the inheritance is received years after filing, a significant windfall can still impact your case. While the trustee may not seize the funds directly, the money inherited can be treated as a substantial increase in disposable income or assets, requiring you to increase your Chapter 13 plan payments to creditors.

Understanding these precise timing rules and the implications for your specific bankruptcy chapter is paramount. Full disclosure of any potential inheritance to your legal counsel and the bankruptcy trustee is mandatory for establishing a sound legal strategy.

If you have received an inheritance after filing for bankruptcy, it is in your best interest to contact an attorney at The Lauterbach Law Firm for guidance. Our legal team will assess if exemptions can protect any part of the inheritance and ensure all forms are accurately amended to avoid devastating legal consequences. Contact our firm today to schedule a consultation.