One of the more difficult decisions you will make is to file for bankruptcy protection. Well, now that you have made that decision and you are making the tough choices to put your economic life back in order, you suddenly find out that your long-lost relative died and left you a sum of money. What do you do now? Do you get to keep the money? Must you turn it over to the bankruptcy trustee? The answer to these questions depends on several things.
First, the date you became entitled to the inheritance is important. For bankruptcy purposes, you become entitled to the inheritance on the date the decedent passes away. Second, you get different treatment depending on which chapter of the bankruptcy code you filed under.
Chapter 7 – If you filed under chapter 7, the basic rule is that any inheritance you become entitled to in the first 180 days after you file your bankruptcy petition with the court becomes part of the bankruptcy estate. This is true for most assets passing to you via a Will, intestate probate proceedings, or assets passing via a Payable on Death (POD) or Transfer on Death (TOD) designation. As a result, the inheritance, minus any exempt portions, would have to be turned over to the bankruptcy trustee to administer on behalf of the creditors you are seeking to discharge. If you become entitled to an inheritance after the 180 day mark, you will get to retain the proceeds.