Be careful with inheritance, spending before bankruptcy filing


To Her Credit
To Her Credit, Sally Herigstad
Sally Herigstad is a certified public accountant and the author of "Help! I Can't Pay My Bills: Surviving a Financial Crisis" (St. Martin's Press, 2006). She writes "To Her Credit," a weekly reader Q&A column about issues involving women, credit and debt, for, and also wrote for MSN Money, and, and has guested on Martha Stewart Radio and other programs. See her website for more personal finance tips and free budgeting worksheets.
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Dear To Her Credit,
We are in the process of filing for bankruptcy. All we have to do is call the lawyer and say, "File." All the paperwork is done. We owe more than $60,000 to creditors, not including our mortgage of $316,000. I work and my husband works, however, he makes much less now after sequestration from his previous job.

I am getting about $15,000 as an inheritance. Is it legal to spend this money prior to filing on reasonable household work and possibly a $5,000 car purchase? We are filing Chapter 13 bankruptcy in Virginia. I absolutely hate this. -- Carol


Dear Carol,
You have three issues: keeping your inheritance, having household work done prior to bankruptcy and if you can purchase a car immediately before you file Chapter 13 bankruptcy.

Let's take these questions one at a time.

The first question is whether the inheritance is part of your bankruptcy estate. If you become entitled to an inheritance before bankruptcy or within 180 days after filing for bankruptcy, the amount of the inheritance is part of your bankruptcy estate. You "become entitled" when the person you are inheriting from dies, regardless of when you actually get the money. Assuming this inheritance falls within the time limits, this money is considered to be available for paying creditors just the same as any of your cash.

Second, you wonder if you can spend money on household work now. Bankruptcy courts generally frown on spending money right before the filing date. You want to be very careful about getting rid of money or taking on new debt right now. It's easy for the bankruptcy courts to look at financial records and see that money has been spent. If it looks like you've had a little pre-bankruptcy spending spree, given money away or otherwise purposefully lowered the amount of cash you can use to pay creditors, your bankruptcy filing may be disapproved.

"Reasonable household work" is not generally a problem if it's normal and necessary. I don't recommend new cabinets and counters right now, of course. If an appliance is broken, fix or replace it. However, now is not the time to do anything that could be construed as shielding cash from creditors. If you have any doubt about what you can spend, ask your attorney.

Your third question is whether you can buy a car. A person might think that buying a car before bankruptcy would come under special scrutiny in bankruptcy situations. If you buy an expensive car, or even a modest but new car, you may very well be in trouble. However, buying an inexpensive car, perhaps one for $5,000 as you suggest, might be a good idea. The courts realize you must get to work, and making sure you have reliable transportation is important.

I don't recommend that you buy a car on credit, however. Although bankruptcy laws provide that you can keep your car in bankruptcy if you meet the requirements, the last thing you need when you're trying to get out of debt is more of it.

Robert Weed, a bankruptcy attorney in Virginia, suggests some other expenditures you might make prior to filing for bankruptcy. He recommends paying for dental work or getting Lasik surgery if you need it, for example.

One other possibility, if it's appropriate for you: Weed also suggests putting money into the Virginia College Savings plan. Not all college savings plan contributions are protected in bankruptcy. By federal law, contributions to college savings plans are only fully protected if they were in the plan two years prior to bankruptcy. However, in Virginia some courts have allowed contributions to Virginia College Savings plans that were made not long before bankruptcy. Weed says, "Keep in mind that they need to be cautious about the Virginia College Savings plan, it may get challenged." In other words, check with your lawyer before you proceed.

As you probably know, a Chapter 13 bankruptcy is different from a Chapter 7 bankruptcy. Most people think of Chapter 7 when they talk about bankruptcy. That's the bankruptcy that discharges most debts as of the bankruptcy date. With Chapter 7, you can lose assets that exceed the exemption amounts in your state. With a Chapter 13 filing, however, you're repaying most of your debts. On the bright side, you don't lose any property if your plan meets the requirements and you keep up your payments.

If the bankruptcy court determines that you spent money you shouldn't have, your Chapter 13 bankruptcy case may be dismissed. All the time and money you've spent so far trying to make a new plan may be for nothing. Talk to your lawyer before you make any major expenditures, and make sure you don't jeopardize your Chapter 13 bankruptcy.

See related: Credit card life after bankruptcy, When is a bankruptcy officially discharged?,

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Published: September 12, 2014

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