Chapter 13 bankruptcy is a form of debt reorganization, which allows individuals with a regular income to pay off all (very rarely) or a portion of their debt over 3 to 5 years. First, the debtor must submit a repayment plan to the court, which the court will approve if it meets certain requirements. Next, the debtor makes payments to a bankruptcy trustee, who distributes the payments to the creditors. It is also known as a wage earner’s plan as it is designed for people with a regular income who can make payments over time.

We’ve previously discussed what happens if you get an inheritance while in a Chapter 7 bankruptcy but what happens if someone gets an inheritance while in a Chapter 13 bankruptcy? That’s a good question and something we’ll talk about. An inheritance is when someone gets money or property from someone who has passed away. Knowing what happens to this inheritance money while you are in a Chapter 13 bankruptcy is important. So keep reading to find out more!

When someone gets an inheritance while in a Chapter 13 bankruptcy, it can affect their Chapter 13 repayment plan. Here’s how:

Part of the Estate:

• An inheritance is considered a part of the debtor’s estate, which means that the bankruptcy trustee, who is the person in charge of overseeing the bankruptcy case, might want to use some of the inheritance money to pay off the debtor’s creditors.

How Trustee Decides:

• The trustee will decide whether to include the inheritance in the debtor’s repayment plan based on how much money the debtor has left each month after paying for necessary expenses, like food and rent. This extra money is called “disposable income.” If the debtor has a lot of disposable income, the trustee might require them to use some of the inheritance to pay off their creditors.

Exemptions:

• However, there are some exceptions to this rule called “exemptions.” One type of exemption is called the “wildcard exemption,” which allows the debtor to keep a certain amount of money or property regardless of their disposable income. So, the debtor may be able to save some or all of their inheritance with the help of exemptions.

If someone gets an inheritance while in a Chapter 13 bankruptcy, there are a couple of options they can choose from to deal with it.

Option 1: Use inheritance to pay off creditors

• Suppose the inheritance is included in the debtor’s repayment plan. In that case, they can use it to pay off their creditors more quickly or to make payments on a car or home. Paying off creditors more quickly could help them get out of debt faster and finish the bankruptcy process sooner.

Option 2: Convert to a Chapter 7 bankruptcy

• If the debtor does not want to use their inheritance to pay off creditors, they can consider converting their Chapter 13 bankruptcy to a Chapter 7 bankruptcy. When a debtor converts to a Chapter 7 bankruptcy more than 180 days after the filing of the Chapter 13 bankruptcy, they may be able to keep the inheritance. Different jurisdictions have had varying rulings on whether or not an inheritance received 180 days after a Chapter 13 bankruptcy filing is property of the bankruptcy estate and potentially at risk with a Chapter 7 Trustee.  

It’s important to consider these options and consult a bankruptcy attorney to determine the best course of action if someone receives an inheritance during a Chapter 13 bankruptcy.

In conclusion, we’ve talked about what happens when someone gets an inheritance while in a Chapter 13 bankruptcy. Here is a quick summary of the main points we covered:

• An inheritance is considered to be a part of the debtor’s estate and may need to be included in the debtor’s repayment plan.

• The bankruptcy trustee will determine whether the inheritance should be included in the repayment plan based on the debtor’s disposable income.

• Exemptions, such as the wildcard exemption, may apply to the inheritance and allow the debtor to keep some or all of it.

• There are several options to deal with an inheritance during a Chapter 13 bankruptcy, such as using it to pay off creditors or converting to a Chapter 7 bankruptcy.

It’s important for anyone who is considering filing for Chapter 13 bankruptcy or who receives an inheritance during the process to consult with a bankruptcy attorney to discuss their specific situation and determine the best course of action. An attorney can help you understand your rights and options and guide you through the process.