For some families, bankruptcy is the only way out from living under a mountain of debt. Filing for bankruptcy is a not a decision most people enter into lightly as the process can have a number of long-term and severe consequences. Once such consequence that tends to go overlooked is the possibility that a person can lose money they stand to inherit if a loved one passes away during the bankruptcy proceedings.
Federal bankruptcy rules require that a person notify the courts if they receive an inheritance after the passing of a loved one within 180 days of the date of filing for bankruptcy. The inheritance will then be included in the bankruptcy estate and will be distributed to creditors as the courts see fit.
These rules also apply to any tangible items that a person may stand to inherit, such as cars, jewelry or furniture. All of these items are subject to the administration of the bankruptcy estate.
However, this doesn't mean that items like these will automatically go up on the auction block. You can claim exclusion on certain things, and the bankruptcy trustee has some discretion in choosing what to liquidate. However, it's still stressful to think about an heirloom that has been in your family for years going to your creditors.
The good news for those filing for bankruptcy, however, is that this situation is entirely avoidable. If you plan to file for bankruptcy and you are worried about any inheritance you may come into during this time, it's important to talk to your loved one about creating a Trust to hold your assets.
By creating a Trust, you and your loved one can keep your share safe from creditors and the courts in a legal and ethical way. In fact, planning to keep an inheritance safe during bankruptcy is similar to tax planning. Tax planning is fine, but tax evasion is not. The difference is whether you play by the rules and are honest. For example, not telling the courts you received an inheritance is illegal and you could face serious consequences. However, you are not skirting the rules if you are the recipient of a Spendthrift Trust. That wasn't your choice.
If you are thinking about filing for bankruptcy and you'd like to learn more about how your loved ones can create a Trust to protect your inheritance from the claims of creditors, simply call our office at (805) 946-1550 to schedule a planning session with a Santa Barbara Trusts and Estates lawyer. We will walk you through the necessary steps that must be taken to protect your inheritance from a bankruptcy filing or any other creditor's claim.