Consumer Law Center of Maryland
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What happens if I Inherit Money After Filing for Bankruptcy?

Bankruptcy signage with gavel next to it

Under normal circumstances, receiving a large cash inheritance would only be a benefit, perhaps one that would offer you a chance to pay off a credit card or make a down payment on a large purchase. However, if you’re about to file or have recently filed for bankruptcy, such gifts may be accounted for and included among your assets by the bankruptcy court, which can substantially limit your freedom to spend that income as you see fit. If you expect to receive an inheritance during a bankruptcy filing, read on to learn about how such gifts may be treated by the court.

Gifts treated differently in different forms of bankruptcy

If you’ve inherited a gift or become the beneficiary of a life insurance or retirement policy prior to filing for bankruptcy, then that sum will automatically be accounted for as part of your bankruptcy estate or disposable income. If you have already filed for bankruptcy under Chapter 13 when you receive the gift, the inheritance is likely to be considered income which must be used to repay your creditors. Your Maryland bankruptcy lawyer may consider dismissing your filing, if the gift would be large enough to pay off the debt, saving you from bankruptcy altogether, or if it would be advantageous to refile under Chapter 7 and attempt to use an exemption to protect the gift from being considered part of the bankruptcy estate.

If you have filed for bankruptcy under Chapter 7 and receive a gift through an inheritance or as a beneficiary within 180 days (six months) of filing, then the gift will be considered part of the bankruptcy estate, to be allocated as the trustee sees fit. Even if your bankruptcy case has been closed, the trustee still must be notified of the gift if received within this window. There is a possibility that a small gift received after the trustee has closed your case will not cause the case to be reopened, as it may not be enough to balance out the expense of reopening the file.

Whenever you become entitled to a gift, tracked by the date the benefactor dies rather than when you receive it, let your attorney know immediately. There may be ways to disclaim the inheritance and offer the gift to a different relative, or, if the person’s passing is somewhat expected, to create a spendthrift trust for the gift in advance. An experienced Maryland bankruptcy attorney will be able to work with you to develop a plan that will most effectively preserve an inheritance.

If you are facing bankruptcy in Maryland and have questions about how to best handle your bankruptcy filing to protect your assets and financial future, contact the knowledgeable Germantown bankruptcy and consumer law attorneys at Haeger Law for a consultation on your case, at 888-463-3520.