If you receive an inheritance while you are in the midst of a Chapter 13 bankruptcy repayment plan, most courts will require that you pay this amount into your Chapter 13 plan. Read on to learn about the Chapter 13 bankruptcy repayment plan, how much you have to pay creditors through your plan, and why you will likely be required to use part or all of your inheritance to pay your debts.
In a Chapter 13 bankruptcy case you propose a plan to repay your creditors over a period of three to five years. You make monthly payments to the bankruptcy trustee who distributes the funds to unsecured creditors. At the end of the repayment period, your debts will be discharged (although there are a few exceptions to this). (Learn more about the Chapter 13 bankruptcy repayment plan.)
Most bankruptcy filers don't pay unsecured creditors in full. In fact, many pay pennies on the dollar. The amount that you must repay to your unsecured creditors is determined by a number of factors, including:
Your income and expenses. You must pay all of your "disposable income" into your plan, which is calculated using a formula which basically subtracts certain allowable expenses from your income.
The value of the property in your bankruptcy estate. In Chapter 13 bankruptcy, you must repay unsecured creditors at least the amount that those creditors would have gotten if you had filed for Chapter 7 bankruptcy. The amount that creditors get in a Chapter 7 is equal to the value of your nonexempt property. This is often referred to as the "best interest of creditors" test. To learn more about the factors that determine the total amount you'll pay to unsecured creditors, see Unsecured Debt in Chapter 13: How Much Must You Pay?
In most states, an inheritance is not considered exempt property. Therefore, in your Chapter 13 plan you would have to make sure that the total amount of your repayment at least equals the value of the inheritance.
EXAMPLE: If you inherit $10,000 just before you file for Chapter 13 bankruptcy, and your state doesn't allow you to exempt the inheritance (as is the case in most states), you would be required to pay your unsecured creditors at least $10,000, but you would be able to spread it out over your three to five year plan.
If your inheritance is part of your bankruptcy estate, you will probably have to use it to pay at least a portion of your unsecured debt. If your inheritance is not part of your bankruptcy estate, however, you would not have to pay back an equivalent amount into your Chapter 13 plan. Whether an inheritance is included may depend on when you become entitled to it. Here are the rules on what is and isn't in your bankruptcy estate.
When a bankruptcy case is filed in court, a bankruptcy estate is formed. The estate consists of all the property you owned at the moment the case was filed. Assets like a house, household goods, bank accounts and vehicles are in the estate, along with other rights in property, like your right to a future tax refund or your right to file a lawsuit against someone who caused you damages.
If you have already received, or are entitled to receive, an inheritance when you file for your bankruptcy case, the inheritance is part of your estate.
In a Chapter 13 case, even after the bankruptcy case is filed, most assets you acquire during the case will be part of the estate, including property you purchase or receive as a gift, money you earn, and certain other rights you acquire. This is not true in Chapter 7 – most property you acquire after you file is yours to keep, with a few exceptions. Those exceptions include the below property, if you received it within 180 days of filing:
That means that if you receive an inheritance within 180 days after filing your petition, it will be part of your bankruptcy estate in both Chapter 7 and Chapter 13 bankruptcy. In Chapter 13, it will figure into the amount that you must repay unsecured creditors.
The law is different if you received your inheritance after 180 days of filing your case. In a Chapter 7 case, any windfalls (like an inheritance) you acquire rights to after the 180 days do not have to be turned over to the bankruptcy trustee.
In a Chapter 13 case, however, the bankruptcy trustee may argue that the inheritance should be part of your bankruptcy estate, regardless of whether you received it after the 180-day period.
In one recent case, the Fourth Circuit Court of Appeals held that the 180-day limit did not apply to a $100,000 inheritance that a married couple received three years into their of their five-year Chapter 13 plan. Carroll v. Logan, No. 13-1024 (4th Cir. October 28, 2013). The court ruled that the inheritance was a windfall and should be part of the bankruptcy estate. Because the $100,000 was not exempt property, the debtors had to modify their Chapter 13 plan to increase the payments to include the inherited amount.
Not all courts have ruled on this issue. But the majority of those that have agree that a debtor receiving an inheritance during a Chapter 13 case must include those funds in his or her repayment plan, often reasoning that it would be unfair to allow the debtor to benefit from the windfall at the expense of the creditors. Some courts have come to the same conclusion by relying on slightly different grounds. A few courts in the Eleventh Circuit (specifically Georgia and Florida) have come to the opposite conclusion, finding that the 180-day limit for including inheritances does not apply in Chapter 13 cases and allowing the debtors to keep the inheritance. Talk to a local bankruptcy attorney to find out how the courts in your jurisdiction treat inheritances received after the 180-day period.