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Does Filing Chapter 7 Bankruptcy Put Your Inheritance At Risk?

  • By: Christopher Benson
  • Published: March 4, 2014

It’s important to plan carefully if you are planning to file for bankruptcy and you know you have a large inheritance or gift coming your way.

In many cases, the Chapter 7 process takes between 90 and 120 days depending on when initial hearings are set. In bankruptcy, an inheritance up until 180 days after filing can be used to pay back debt you owe ** even if your bankruptcy case is closed by the Bankruptcy Court.** The important thing to note is when that crucial time period ends and begins. The clock starts ticking the day you file.

So what happens when you report a gift during the 180-day period? The money becomes part of your bankruptcy estate and is distributed among your creditors. This is true of cash or any item of value, even cars or property. So if you know you are going to receive something within that period, what do you do?

An option is to have the person who will be leaving you an inheritance contact an estate planning attorney and set up a trust with a spendthrift trust for you. This would be a better option for cash, which would be more tempting not to return. A spendthirft trust would be beyond the reach of the courts. Obviously, this would require the person intending to leave you a gift do a little extra work to help ensure that you actually receive the intended gift.

Second, just because something is a part of your property doesn’t mean it will be automatically auctioned off at bankruptcy. You can claim exclusions on certain items up to a limit. The bankruptcy trustee in your case also has some discretion in what to liquidate.

Over the past 22 years, we have helped over 2,300 Washington clients obtain financial relief and a Fresh Start by filing a Chapter 7 or Chapter 13 Bankruptcy. We offer a free consultation to determine whether we can help you as well.

Over the past 22 years, the Law Offices of Christopher A. Benson has helped more than 800 clients prepare and utilize simple and effective planning techniques to protect them and their families in order to avoid probate, save estate taxes, save money and save added emotional burden that comes from long term illness and/or death of a family member. Give us a call to schedule a free consultation to find out how we can help you and your family.

Christopher Benson

About the Author Chris served on the Board of Directors for Habitat for Humanity
Seattle/S. King County for 10 years and served as Vice President
of the organization during part of that time. Read More