The saying “timing is everything” applies to many things in life, and that includes how bankruptcy can affect your inheritance in California. If you received an inheritance before filing for a Chapter 7 bankruptcy, it can become part of your bankruptcy estate just like any of your property unless you can protect it with a bankruptcy exemption. But what if you declare bankruptcy and then your Great Aunt Estelle dies unexpectedly and leaves you a fortune? Well, that may be a different matter depending when she died.
Article at a Glance
- If someone dies and leaves you an inheritance within 180 days after you file bankruptcy, that property will become part of the bankruptcy estate unless it falls under an exemption.
- The 180 days is measured from the date of filing until the date of death, not when you receive the inheritance.
- You have options, but you should discuss them with your attorney as soon as you can. Your attorney will need to amend your bankruptcy documents that were submitted to the court.
The 180 Day Rule
A chapter 7 bankruptcy forgives most of your debts, but the bankruptcy trustee can sell your assets in order to pay off creditors except for those assets that fall under an exemption. Usually, after you file for bankruptcy, any property you acquire cannot be touched by the bankruptcy trustee. However, this is not true for inheritances. If someone dies within 180 days after you file for bankruptcy and leaves you an inheritance, it becomes part of your bankruptcy estate unless it falls under an exemption.
The important date is the date of death; it does not matter when you actually receive the property. If Great Aunt Estelle dies and leaves you a fortune 181 days after you filed for bankruptcy, you’re in the clear and can keep the entire inheritance. But if Great Aunt Estelle dies within 180 days of the time you filed for bankruptcy, you’re out of luck unless the property is exempt under bankruptcy law. The reason the law adds 180 days for inherited property is to stop people from declaring bankruptcy right before they get an expected inheritance, because they do not want to pay creditors with that inheritance.
What to Do if Your Inheritance Falls Within 180 Days After Your Bankruptcy Filing
- The first thing you should do when you learn of the inheritance is to call your California bankruptcy attorney, who can lay out your options. Your lawyer also must amend your bankruptcy filing with the court. Don’t even think about not reporting it, because that would be criminal fraud, which could land you in prison. And there is a very good chance your bankruptcy trustee would find out.
- If the inheritance is a large one, you may be able to pay your creditors with it and avoid bankruptcy all together. Possibly your attorney can negotiate a settlement of less than you owe with them.
- As already mentioned, part or even the inheritance if it is not a large one, may fall under bankruptcy exemptions, which would enable you to keep the exempt portion. In California, if you opt to use California exemptions under California Code of Civil Procedure Section 703 rather than federal exemptions or those under California Code of Civil Procedure Section 704, you could claim a wildcard exemption, which could enable you to protect over $28,000 of your inherited property or any other property. Of course, you may want to use that exemption for another purpose such as protecting your home.
- At one point, if you were anticipating an inheritance, Great Aunt Estelle could have set up a spendthrift trust naming you as heir rather than leaving you the properly directly in her will. In the past, creditors could not touch spendthrift trusts in California. But in 2017, the 9th Circuit opened spendthrift trusts to creditors.
Consult with Your California Bankruptcy Attorney
If you think there is even a chance you could inherit money or property within six months after you file for bankruptcy, be sure to inform your bankruptcy attorney. If you file for bankruptcy relief and someone passes away and leaves you an inheritance within 180 days after you file for bankruptcy contact your attorney immediately. Remember, the important date is the date the person passed away. The date you actually received the property is of no consequence to the bankruptcy court.
M. Erik Clark is the Managing Partner of Borowitz & Clark, LLP, a leading consumer bankruptcy law firm with offices located throughout Southern California. Mr. Clark is Board Certified in Consumer Bankruptcy by the American Board of Certification and a member of the State Bar in California, New York, and Connecticut. View his full profile here.