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Chapter 7 bankruptcy and inheritances: what you should know

When Colorado residents receive a substantial inheritance, it can be a welcome event. This may be particularly true for someone who is facing financial challenges and considering filing for Chapter 7 bankruptcy. However, there are rules governing inheritances that come into play in Chapter 7, which those who are considering filing must be aware of before filing.

As a general matter, one of the advantages of straight bankruptcy is that individuals are entitled to keep future income they receive. However, inheritances, like other property a debtor has, are considered assets. Accordingly, individuals must disclose at the time of filing bankruptcy whether they are expecting to receive an inheritance.

Fortunately, there are time constraints on inheritances that must be disclosed. If a person receives an inheritance within 180 days of filing for bankruptcy, the inheritance is subject to being included in the bankruptcy estate. Otherwise, individuals do not typically need to disclose inheritances that may come at some future uncertain date.

Moreover, when individuals receive an inheritance prior to filing for bankruptcy, they generally may reasonably spend the money without running afoul of creditors. It all depends on how much the inheritance is, and what state the person resides in, but if the money is not enough to pay off creditors, it may be put to use on household items or assets. For example, someone may decide to use the money to fund a retirement account, or buy a dependable vehicle.

However, a person must be sure they account for how the inheritance money is spent under these circumstances. In addition, a person cannot hide the money or give it away in an attempt to shield it from creditors. Ultimately, someone who receives an inheritance should consult a qualified bankruptcy attorney to determine how the money should be properly handled.

Source: Fox Business,"Will bankruptcy affect inheritance money?," Justin Harelik, Feb. 19, 2013

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