Is inheritance at risk with bankruptcy filing?

By Sally Herigstad

To Her Credit

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 CreditCards.com, and also writes regularly for MSN Money, Interest.com and Bankrate.com, and has guested on Martha Steward Radio and other programs. See her website SallyHerigstad.com for more personal finance tips and free budgeting worksheets. Ask Sally a question, or read her previous answers in the To Her Credit archive

Dear To Her Credit,
I've been reading your information on Chapter 7 bankruptcy and inheritance. Our bankruptcy was filed on Feb. 28, 2011, and my father passed away Sept. 19, 2011. We received a portion of his life insurance Oct. 28, 2011. The rest of the estate has not been settled and likely won't be for quite some time because his house has to be sold first.

From the date our bankruptcy was filed to the passing of my father was 203 days. From the bankruptcy filing to the date we actually received a portion of an inheritance was 242 days.

Do we need to worry about advising the bankruptcy courts of this partial inheritance? I am praying not, as we've used most of it to pay other bills to try to get ahead after the bankruptcy. Please let me know as soon as possible.  -- Laura

Dear Laura,
I have good news for you! According to Ted Connolly, bankruptcy attorney and author of "Road Out of Debt," you can rest easy. "The inheritance is no longer part of their [bankruptcy] estate and is theirs to keep," he says.

Generally, any money or other assets you have when you file for Chapter 7 bankruptcy can be used to pay the amounts you owe, with certain exclusions depending on the state where you live. (Chapter 7 is the type of bankruptcy most people think of, in which most debts are eliminated, as opposed to Chapter 13 bankruptcy in which you pay back some or all of your debts.) In most cases, however, money you receive any time after you file for bankruptcy is yours. For example, if you get your dream job and start making lots of money the month after you file for bankruptcy, or even if you win the lottery, the bankruptcy court doesn't come looking for additional money to pay back your creditors.

It's a little different when an inheritance is involved, however. Often, people have some idea an inheritance is coming when a parent is in ill health. Courts take a dim view of people filing for bankruptcy shortly before they qualify for an inheritance, especially if it looks like they just wanted to get out of using the inheritance to pay bills. That's why under federal law there is a 180-day window after bankruptcy is filed. During that time, if someone dies and leaves you an inheritance, you must tell the bankruptcy court. If your father had died 179 days after you filed for bankruptcy, you would be required to turn over your inheritance to the bankruptcy estate. The court would use your inheritance to pay your creditors. The span from Feb. 28 to Sept. 19 exceeds 180 days by about three weeks, so you're in the clear.

I'm glad to hear you're using the inheritance to pay current bills and try to get ahead. Connolly agrees: "Good to hear they were responsible and paid bills rather than taking a vacation in Bora Bora!"

Going through both a bankruptcy and the loss of a parent in one year's time is a lot of stress. My condolences on the loss of your father, and I hope this year is a brighter one for you and your family.

See related: Can collectors come after your inheritance?, Filing for bankruptcy can threaten inheritance, Can bankrupcty tap surprise inheritance?

Gary Foreman, "New Frugal You"

Sally Herigstad, "To Her Credit"

Cathleen McCarthy, "Cashing In"

Jane McNamara, "Let's Talk Credit"

Elaine Pofeldt, "Your Business Credit"

Erica Sandberg, "Opening Credits"

Published: July 6, 2012

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