The Impact of Bankruptcy on Inherited Assets in Alabama

Filing for bankruptcy can be an effective way to eliminate debt and give yourself a fresh financial start. However, many individuals wonder what happens to their inherited assets when they file for bankruptcy. If you’ve recently inherited property, cash, or other assets, it’s important to understand how these assets are treated during bankruptcy proceedings.

Below, we’ll explore how inherited assets are handled in both Chapter 7 and Chapter 13 bankruptcy cases, the risks involved, and what steps you can take to protect those assets from creditors.

What Are Inherited Assets?

Inherited assets refer to any property, money, or possessions you receive from a family member or someone else who has passed away. These can include cash, real estate, valuable items such as jewelry or artwork, and investments. Inherited assets can be an important source of financial security, but if you are considering bankruptcy, you may wonder how they will be impacted by the process.

How Inherited Assets Are Treated in Bankruptcy

Whether your inherited assets are at risk during bankruptcy largely depends on when you inherit them and the type of bankruptcy you file. Below is a breakdown of how Chapter 7 and Chapter 13 bankruptcy treat inherited assets.

1. Inherited Assets in Chapter 7 Bankruptcy

In Chapter 7 bankruptcy, the debtor’s non-exempt assets are liquidated to pay off creditors. However, bankruptcy law provides exemptions to protect certain types of property from being sold. The treatment of inherited assets in Chapter 7 largely depends on whether the assets are considered exempt or non-exempt.

Exempt vs. Non-Exempt Property
Each state has its own exemption laws that determine which assets can be kept during bankruptcy. Some assets, like your home (subject to equity limits) or retirement accounts, may be exempt from liquidation. However, if your inherited assets do not qualify for exemption, they could be sold by the bankruptcy trustee to pay off creditors.

Timing of Inheritance
The timing of when you inherit the assets is crucial. If you inherit assets within 180 days (about six months) of filing for bankruptcy, those assets may be included in your bankruptcy estate and could potentially be liquidated. This rule exists because the bankruptcy code treats assets inherited within this timeframe as part of the debtor’s estate, regardless of whether they were acquired before or after the filing date.

For example, if you inherit a piece of property or a large sum of money within 180 days of filing for Chapter 7 bankruptcy, it may be subject to liquidation by the trustee, even though the inheritance was received after filing.

How to Protect Inherited Assets in Chapter 7
To protect your inherited assets in Chapter 7 bankruptcy, it’s important to consult with a bankruptcy attorney. Some strategies may involve transferring assets to a family trust, using exemptions to protect assets, or filing for bankruptcy at a time when you are less likely to inherit assets within the 180-day period.

2. Inherited Assets in Chapter 13 Bankruptcy

Chapter 13 bankruptcy is a reorganization plan where the debtor repays creditors over three to five years. Since Chapter 13 involves a repayment plan, it’s less likely that assets will be liquidated, but inherited assets can still play a role in the bankruptcy process.

Incorporating Inherited Assets into Your Plan
If you inherit assets while in a Chapter 13 repayment plan, those assets may be considered part of your disposable income, which could affect your monthly payments. The bankruptcy court may require you to use those inherited assets to increase your plan payments, depending on the value of the inheritance and the amount of your existing debt.

Inherited Assets and Chapter 13 Duration
In some cases, an inheritance may extend the length of your Chapter 13 repayment plan. For example, if the inheritance increases your disposable income, the court could require you to extend your repayment plan so creditors are paid more during the term. On the other hand, if your inheritance is substantial, you may be able to complete the plan early by using the inheritance to settle debts.

Timing of Inheritance in Chapter 13
Similar to Chapter 7, the timing of your inheritance can impact its treatment in Chapter 13. If you inherit assets within 180 days of filing for bankruptcy, those assets may be considered when calculating your Chapter 13 plan payments. However, unlike Chapter 7, these assets typically won’t be liquidated, but they will factor into the amount you are required to pay to creditors.

Potential Risks to Inherited Assets in Bankruptcy

While bankruptcy laws do provide protections for certain types of property, there are risks associated with inherited assets, especially if they are received shortly before or during the bankruptcy process. These risks include:

• Liquidation: In Chapter 7, if your inherited assets are not exempt, they may be sold by the bankruptcy trustee to pay creditors.
• Impact on Repayment Plan: In Chapter 13, inherited assets could increase your monthly payments, possibly making your repayment plan more expensive and lengthening its duration.
• Fraudulent Transfers: If you transfer inherited assets to family members or other third parties to avoid their inclusion in bankruptcy, the court may consider it a fraudulent transfer. This can result in serious legal consequences, including criminal charges.

Protecting Your Inherited Assets During Bankruptcy

If you are concerned about protecting your inherited assets, there are several strategies you can employ:

1. Timing Your Filing

The timing of your bankruptcy filing is crucial when it comes to inherited assets. If you are expecting to inherit assets soon, it may be beneficial to delay your filing until after you’ve received the inheritance. Conversely, if you inherit assets within 180 days after filing, they may be included in your bankruptcy estate.

2. Use Exemptions to Protect Assets

Make sure to take full advantage of state and federal exemptions that protect certain types of assets from liquidation. Some states have more generous exemptions for real estate, personal property, or retirement accounts, which may apply to your inherited assets.

3. Seek Legal Advice

Bankruptcy law can be complex, and the treatment of inherited assets can vary depending on your circumstances and location. It’s essential to consult with a bankruptcy attorney who can guide you through the process and help you develop strategies to protect your inheritance.

4. Consider a Trust or Other Legal Structures

In some cases, it may be beneficial to place your inherited assets into a trust or other legal structures that can offer protection from creditors. This may be particularly important if you are concerned about future bankruptcy filings or potential creditor actions.

Concerned About Inherited Assets in Bankruptcy? Contact Our Seasoned Alabama Attorneys

Inherited assets can play an important role in your financial future, but their treatment in bankruptcy can be complex. Whether you’re filing for Chapter 7 or Chapter 13 bankruptcy, understanding how your inheritance will be affected is crucial to protecting your assets.

If you’re facing bankruptcy in Alabama and are concerned about the impact on your inheritance, it’s essential to consult with a bankruptcy attorney who can guide you through the process and ensure that your inherited assets are properly protected.

Padgett & Robertson is here to provide expert legal guidance when it comes to bankruptcy and asset protection. If you need help navigating bankruptcy law and safeguarding your inheritance, call us at (251) 336-3695. Let us help you make informed decisions to protect your financial future.