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Will your inheritance be included in your Chapter 13 bankruptcy?

One thing people considering personal bankruptcy should understand is that the Bankruptcy Code defines a debtor's estate according to the specific kind of bankruptcy chapter that has been filed. In other words, a filer's estate has to meet certain criteria to qualify either for Chapter 13 (debt reorganization) or for Chapter 7 (asset liquidation).

Under Chapter 7, the debtor is allowed to liquidate assets to pay back creditors, and any remaining unsecured debts, including credit card debt and medical debt, can be discharged. Chapter 13 involves a debt repayment plan that allows a filer to reorganize debts and partially discharge secured debts like home mortgages and car payments. In some cases, however, a bankruptcy filer may have to change the type of bankruptcy or create a new repayment plan if the filer's financial situation changes.

One recent bankruptcy decision dealt with an inheritance received by a man who, along with his wife, had filed a Chapter 13 petition. The man's mother had passed away, and he told the bankruptcy court that he expected to inherit about $100,000. By the time the court was notified, it had been more than three years since the bankruptcy was filed, and the case was still open.

After being notified of the inheritance, the bankruptcy court decided to include in the Chapter 13 repayment plan "an amount of the inheritance, if and when received, sufficient to pay in full all of the allowed general unsecured claims."

The debtors appealed the ruling and, referring to a section of the Bankruptcy Code, argued that the inheritance should not be included in the repayment plan.

In response, the court pointed to a section of the Bankruptcy Code that refers specifically to Chapter 13 and how estate property is defined in that type of bankruptcy. Because the Chapter 13 case was still open when the filer would receive the inheritance, the estate should be expanded to include the inheritance, according to the court.

To be fully aware of their rights, New York residents facing a similar situation should speak with a bankruptcy attorney and establish a legal strategy for achieving the best possible outcome.

Source: Bloomberg Law, "Debtors' Inheritance Received Before Ch. 13 Case Closed Is Property of Bankruptcy Estate," Diane Davis, Nov. 6, 2013

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