Two Bankruptcy Mistakes People Make With Inheritances

Though inheriting money or property is often a fortuitous event, people who filed bankruptcy—or plan to do so—often make mistakes that result in the assets being confiscated by the bankruptcy trustee. Here are two common blunders people make when dealing with an inheritance during bankruptcy and how to avoid them.

Not Planning for the Windfall

Not all inheritances come out of the blue; sometimes they can be predicted. Although it may be difficult dealing with the circumstances leading to your receiving assets from a loved one, you'll be doing yourself and the person a disservice if you don't take steps to protect them.

There are things you can do to keep your inheritance from being included in your bankruptcy estate and parceled out to creditors. Depending on its value, the inheritance may be covered by bankruptcy exemptions, for instance.

If the assets' value exceeds available exemptions, it may still be possible to avoid having them taken by requesting they be placed in a trust. There are several different kinds, and some are bankruptcy-resistant if they're set up the right way. However, it's essential you talk to an attorney for advice on how to go about it legally because you could be accused of bankruptcy fraud is this is mishandled.

Your inheritance is only vulnerable to being seized within 180 days of you becoming entitled to receiving it (usually the day of the benefactor's death). Thus, you can always postpone filing until the deadline passes, whereafter the issue becomes a moot point.

Commingling Funds Prior to Filing

Unless your spouse files joint bankruptcy with you, any inheritance they receive will not be taken because it is considered separate property, even though you're married. That doesn't mean it is completely untouchable. A bankruptcy trustee can still take some of the assets if it loses its status and becomes a part of the marital estate.

This commonly happens when spouses commingle funds. Your spouse may not think twice about depositing an inheritance check into your joint account, but doing so can prompt the trustee to claim some of that cash on the grounds that it's now marital rather than separate property.

The same thing can happen with physical assets. If your spouse gives the property to you as a gift or names you as a co-owner (e.g. on a house or car), the asset itself or the value of your part of it will be added to your bankruptcy estate.

Take steps to maintain your spouse's inheritance as separate property, such as having your spouse deposit money in an account he or she solely owns, at least until your bankruptcy case has concluded.

For more advice on protecting an inheritance or how to file, speak with a chapter 7 bankruptcy attorney, in your area.