- You are most likely to lose your inheritance if you file Chapter 7 bankruptcy. The reason for this is that Chapter 7 is a "liquidation" bankruptcy, in which the court has the right to take and sell certain property as payment to creditors. Each state has a list of bankruptcy exemptions that you can use to shield certain property from possession by the court. However, exemptions are typically limited to basic, essential items, and items of particular value, such as sports cars and rare art, must usually be forfeited to the court. If you receive a substantial inheritance that you cannot protect using your state's exemption laws, then the court will take control of that inheritance.
- You are more likely to keep your inheritance if you file Chapter 13 bankruptcy than if you file Chapter 7 bankruptcy. Chapter 13 bankruptcy protects your assets from both your creditors and from the court, regardless of how valuable they are. If you inherit $10,000,000 and 12 sports cars, you will not have to surrender them to the court. However, you will have to make a specified number of monthly payments to your creditors to satisfy your outstanding debts.
- An inheritance is one of the few assets that the court can retrieve from you even after your bankruptcy case concludes. If you receive your inheritance more than 180 days after you file bankruptcy, you can keep it, no matter how valuable. However, if your inheritance arrives less than 180 days after you file bankruptcy, the court considers that inheritance to be part of your bankruptcy estate. If you filed Chapter 7 and do not have enough exemptions to cover the amount of the inheritance, the bankruptcy court can seize your inheritance and distribute it to your creditors. The court considers the right to an inheritance the same as if you actually received an inheritance payout, so you cannot avoid surrendering your inheritance if you are entitled to it even if you have not yet physically received it.
- Even if you must legally turn over your inheritance to the court, there is a chance you can keep some or all of it. If you have non-exempt assets that are difficult to administer, the bankruptcy trustee in your case may choose to abandon your inheritance, rather than expending the time and money to physically retrieve it. For example, if your inheritance is technically more than the exemption limit but not by much, the trustee may decide it is not worth pursuing.
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