What Happens If You Inherit Money While in Chapter 13?

Chapter 13 bankruptcy provides individuals a structured path to repay debts over three to five years under court supervision. This plan allows debtors to retain assets while making regular payments. An inheritance can significantly alter a debtor’s financial landscape during this period.

Reporting Requirements for Inherited Assets

Debtors must report any inheritance received during an active Chapter 13 bankruptcy to the trustee, even if received after the initial filing. The Bankruptcy Code mandates that property acquired by inheritance within 180 days of filing becomes part of the bankruptcy estate. This provision, found in 11 U.S.C. § 541, prevents debtors from timing their filing to exclude an imminent inheritance.

The 180-day rule refers to when the debtor becomes “entitled” to the inheritance, typically the date of the decedent’s passing. Beyond this window, Section 1306 of the Bankruptcy Code broadens the bankruptcy estate for Chapter 13 cases to include all property acquired before the case closes, dismisses, or converts. This means an inheritance received at any point during the Chapter 13 plan generally becomes property of the estate and must be disclosed. Inherited assets can include cash, real estate, stocks, bonds, or personal property.

How Inheritance Affects Your Chapter 13 Plan

An inheritance received during Chapter 13 typically impacts the repayment plan. The trustee views it as additional disposable income or a new asset for creditors. The primary goal of a Chapter 13 plan is for debtors to dedicate disposable income towards repaying unsecured creditors.

When an inheritance is received, the trustee may amend the repayment plan to increase distributions to unsecured creditors. This could involve increasing monthly payments, requiring a lump-sum payment from the inherited funds, or paying off the plan early. The trustee considers the debtor’s remaining funds after necessary living expenses, with any surplus considered disposable income. Most courts require these funds to be paid into the Chapter 13 plan, even if received after 180 days, to ensure creditors are paid.

Exempting and Protecting Inherited Funds

While an inheritance generally becomes part of the Chapter 13 bankruptcy estate, debtors may protect a portion of these funds through exemptions. Exemption laws allow debtors to retain certain property for a fresh start. Debtors typically choose between federal or state exemption systems, but cannot combine them.

Common exemptions for inherited assets include a homestead exemption for inherited real estate that becomes the debtor’s residence, or personal property exemptions for items like jewelry, vehicles, or household goods. Some states offer a “wildcard exemption” for any property, including cash from an inheritance. The ability to protect inherited funds depends on the asset type, its value, and the specific exemption laws. If the inherited asset’s value exceeds the exemption, the non-exempt portion may be liquidated or paid into the Chapter 13 plan for distribution to creditors.

Modifying Your Chapter 13 Plan

If a debtor receives an inheritance during Chapter 13, formally modifying the repayment plan is a necessary step. This process typically begins with the debtor, trustee, or an unsecured creditor filing a motion with the bankruptcy court. The motion to modify the confirmed Chapter 13 plan must demonstrate a significant change in circumstances that necessitates an adjustment.

The motion outlines proposed changes to the payment schedule, which might include increasing monthly payments, making a lump-sum payment from the inherited funds, or shortening the plan’s duration. The debtor must provide detailed information and documentation, such as proof of the inheritance and updated financial information. The trustee will review the proposed modification, and creditors may object. If objections arise, a court hearing may be held for the judge to decide whether to approve the modification. The court’s approval ensures the debtor’s obligations are adjusted to the new financial reality.

Implications of Not Disclosing an Inheritance

Failing to disclose an inheritance in Chapter 13 can lead to severe consequences. Bankruptcy law emphasizes full disclosure of all assets and liabilities; intentionally concealing property is considered bankruptcy fraud. If a debtor fails to report an inheritance, even by mistake, the bankruptcy case could face dismissal. This means the debtor loses bankruptcy protection and remains liable for all debts.

The court may deny a debt discharge, preventing the debtor from eliminating obligations. If a discharge was granted, it can be revoked upon discovery of undisclosed assets. More serious repercussions include criminal charges, such as perjury or bankruptcy fraud, carrying potential penalties of substantial fines and imprisonment. The bankruptcy trustee can investigate financial records, and any attempt to hide assets can be uncovered. Transparency and immediately seeking legal counsel upon receiving an inheritance are important.