How can a trustee find out about an inheritance?

The Bankruptcy Code provides that an inheritance the filer becomes entitled to receive in the 180 days after their case is filed has to be turned over to the bankruptcy trustee so it can be paid to creditors. This article will explore why this rule exists, how it works exactly, and why it’s never a good idea to try and hide things from the trustee. 

Property of the estate

The bankruptcy estate gets created when you file for bankruptcy. Everything you own, called your assets, is property of the estate. This means your real estate, like your home, your bank and retirement accounts, and your personal property, including your car and furniture, are all part of the bankruptcy estate.

The estate isn’t just the money, property and things you own on the date you file your bankruptcy petition. It also includes money and property you have a future interest in. The most common example of a future interest is your tax refund. This “future property” isn’t in your bank account now, but it is money that you will get in the future.

Inheritances as estate property

Inheritances that you receive, or are eligible for, within 180 days after filing bankruptcy, are also property of the estate. The 180 days begins on the day you file bankruptcy, so it’s a 180-day post-petition window. Anything you receive, including money, life insurance payments, and physical things left in a will, is part of the bankruptcy estate.

Why the law makes sense

This rule was made because people were trying to abuse the bankruptcy system. They knew that a windfall was coming soon, such as a large inheritance. These people would file their Chapter 7 Bankruptcy papers quickly, while a rich relative was on their last legs, knowing they’d have the money soon. This let them avoid their creditors, but still keep their inheritance.

The “180 day rule” was added to the Bankruptcy Code to prevent people from taking advantage of bankruptcy debt relief like this.

Your duties as a debtor in bankruptcy

If you receive an inheritance during the 180-day post-petition window after filing your Chapter 7 bankruptcy, you’ll have to amend the forms. You’ll need to show that this money is now part of your bankruptcy estate. 

It doesn’t matter if the money comes to you the next day, or if the property is tied up in probate court for months or even years. Even if you don’t see the money until well after your bankruptcy case is done, if the person who leaves you something passed away during that 180-day post-petition period, this is not your money. That money belongs to the bankruptcy estate.

You’ll need to file an amended Schedule A/B with the bankruptcy court listing the inheritance. You might be able to keep some or all of the money through a wildcard exemption, depending on the size of the inheritance and your state’s laws about bankruptcy exceptions. If you’re having trouble with this paperwork, a bankruptcy attorney can help you sort it out.

If nothing else, the bankruptcy trustee will need the contact information for the personal representative named in the will, sometimes known as the executor of the will.

Fighting the trustee every step of the way won’t do any good – it will actually harm you. The trustee earns attorney fees for managing your case. These fees come out of your bankruptcy estate. If you hide information from the trustee or push back on every decision, this could easily eat up any extra money that would otherwise get returned to you. It might feel good to win some legal battles, but it’s usually not worth the cost,especially if the battle was ill-advised to begin with.

How can a trustee find out about an inheritance if I don’t tell them? 

Don’t go into your bankruptcy trying to hide information from the trustee. Don’t pretend that you can forget to tell them information. This will not end well for you.

You should assume that the trustee will find out about an inheritance or any other windfall that comes your way. This can happen in a couple different ways. Both bankruptcies and probate cases (dividing inheritance) are part of the public record, so anybody can look up this information.

For example, the personal representative or the executor of the will could contact the trustee on their own. You may have a disgruntled relative who contacts your trustee because they were cut out of the will. The probate court itself could contact your trustee. 

Long story short, trustees can and will find out about your inheritance. It will be much better, and probably cheaper, for you if they hear it from you first.

What happens if I don’t tell the trustee?

If you don’t tell the trustee about your inheritance, you should assume they will find out eventually. Not telling the trustee about your inheritance will not protect it. If the trustee finds out about the inheritance in the future, it could cost you a lot more money than if you had come clean in the first place. In fact, if you don’t report your inheritance, you could be facing charges of bankruptcy fraud.

If and when the trustee does find out about the inheritance, they can reopen your bankruptcy case. They can demand that you pay your inheritance to the bankruptcy estate and divide your inheritance among your creditors. This is true even if you already spent the inheritance.

The trustee can also ask the court to revoke your bankruptcy discharge, meaning that you might still owe money on your old debts. This worst-case scenario can be compounded by the trustee, who could get a non-dischargeable judgment against you for the inheritance you didn’t tell them about and didn’t turn over. At the end of the day, it’s simply not worth the extra risk to hide this money from your trustee.

I would rather have any inheritance I might receive go to my family. Is there anything I can do? 

If you’ve already filed bankruptcy, and the person died within 180 days of your filing date, there’s not much you can do to protect the inheritance. Unfortunately, if the inheritance was money, or financial or bank account, the money becomes property of the bankruptcy estate.

However, if the inheritance was real property, like a family home, or personal property, like your great-grandmother’s jewelry, your relatives can buy it from you. You might also be able to convert your Chapter 7 bankruptcy into a Chapter 13 bankruptcy. This would let you personally buy back the asset you want to keep, by paying for it with your Chapter 13 plan.

You probably won’t be able to dismiss the Chapter 7 case outright. It’s not easy to stop the bankruptcy process once it’s begun. Coming into an inheritance, or finding another asset that doesn’t fall into one of your state’s exemptions isn’t a good enough reason for the court to dismiss your bankruptcy case. 

If you haven’t filed your Chapter 7 case yet, you might be able to disclaim your inheritance. Your state’s laws, rather than federal law, will say if, and how this works. In some cases, the inheritance will get distributed to your next of kin. In any case, you should speak with a bankruptcy attorney before making any moves. Your relatives can also work with an estate planning law firm to help keep important assets in the family.

Conclusion

In a nutshell: if you become eligible to receive an inheritance within 180 days after filing bankruptcy, this money is property of the estate. This money can be used to pay your creditors. Even though it seems unfair to give up your inheritance, think about it this way: it’s not fair to the people and companies you borrowed money from if you don’t pay back your debts when you have the money. A lot of people feel guilt about not paying their unsecured creditors, like their credit cards or medical bills - try to remember whether you felt that way when you first started on your bankruptcy journey. It will help you put things in perspective.