Will My Inherited Money Be Taken in Bankruptcy?

If your loved one set up an estate planning tool like an irrevocable trust with a spendthrift provision, these tucked-away assets may remain protected should you ever have to file for bankruptcy. However, if you received a direct transfer of money assets through a payable-on-death account or otherwise, you may be put in a more vulnerable position. With that being said, please read on to discover whether your inherited money will be taken during bankruptcy and how a seasoned Louisville, Kentucky consumer bankruptcy lawyer at Schwartz Bankruptcy Law Center can help you adopt legal measures to keep this cash in your possession.

Under what circumstances will my inherited money be taken in bankruptcy?

Under the United States Bankruptcy Code, there is something known as the 180-day rule. This rule holds that if you receive a monetary inheritance within 180 days of your bankruptcy filing date, you must report it to your appointed bankruptcy trustee. Similarly, and also importantly, this rule applies if you became “entitled” to this money inheritance within 180 days; this means that your loved one passed away within this short timeframe of your bankruptcy filing date.

So, for a Chapter 7 bankruptcy case, your trustee may have the authority to include your inheritance in your bankruptcy estate. This means that they could give this cash to your creditors and settle your outstanding debts. As for a Chapter 13 bankruptcy case, your inheritance may be treated as a new income or asset that must be considered in your three- to five-year repayment plan. This means that your trustee may motion to increase your monthly payments or even give lump-sum payments to your creditors.

What legal actions can I take to protect my inherited money during bankruptcy?

Understandably, you do not want the money your loved one worked so hard to save for you to disappear in one fell swoop, so to speak. And so, you may strongly consider exploring your legal options to protect this inheritance, not just for yourself but for your loved one’s legacy. Well, the first thing you may look into is bankruptcy exemptions. While there is no specific exemption for inheritances, you may categorize them into other applicable categories.

For example, in the state of Kentucky, there is a wildcard exemption of up to $1,000 that can be used for any personal property of your choosing. The federal wildcard exemption is $1,475 for any property, plus up to $13,950 of any unused portion of the homestead exemption. Of course, the federal exemption may seem more ideal, but you must understand that this means you will have to claim only federal exemptions and cannot mix and match with state exemptions. So you must carefully consider all the property and assets you wish to safeguard.

Or, you may consider refusing or disclaiming your inheritance. This is so it may go to the designated successor beneficiary (i.e., your spouse or child) rather than being transferred to creditors in your bankruptcy case. However, you must be careful with this strategy, as it may appear to the bankruptcy court and your trustee that you are trying to evade paying your creditors. If they believe that you are harming your creditors in this way, they may even accuse you of committing fraud.

For further legal assistance, please hire a competent Louisville, Kentucky consumer bankruptcy lawyer from Schwartz Bankruptcy Law Center. Schedule your initial consultation with us today, and see just how much we can do for you.