An individual who files a chapter 13 or chapter 7 personal bankruptcy case is afforded a great deal of relief from their debts. In exchange for this huge debt relief, a person who files for bankruptcy (aka the “debtor”), is required to make payments to creditors in a chapter 13 repayment plan and, in some circumstances, is required to surrender property to pay creditors in a chapter 7 case.
In either type of case, bankruptcy law is essentially designed to allow debtors to keep their basic necessary property such as their home, a modest vehicle, clothes, furniture, etc., protected from their creditors, while allowing creditors to collect against other nonessential property (i.e. excessive amounts of money in the bank, boats, ATVs, tax refunds and etc.). In return, the debtor is allowed to “discharge,” or eliminate their legal responsibility to pay most types of debts.
When someone passes away, the debtor may become entitled to receive proceeds from the deceased person’s property, from insurance proceeds, or even from proceeds related to a lawsuit arising from the deceased person’s death. When a debtor files a bankruptcy case, they may choose either Federal or State “exemptions” to protect their property. A debtor who is entitled to receive life insurance proceeds from a deceased person may exempt, and legally protect, those insurance proceeds, up to, at least, $50,000, under Minnesota State exemptions. Under the Federal exemptions, the debtor may exempt as much of the life insurance proceeds as they need to support themselves, which could be much more than $50,000 if they can demonstrate to the court that they require the money to meet their financial needs. If the deceased person died due to the negligence of another, and a wrongful death suit is brought against the negligent individual or company, a debtor, who was a “dependent” of the deceased person, is entitled to keep any money they recover from the wrongful death lawsuit under State exemptions. The debtor would be considered a dependent of the deceased person if they were a dependent child or a spouse of the debtor at the time of the deceased’s death. Under Federal exemptions, the debtor would be entitled to as much of the recovery as is reasonably necessary for their support, just as with the proceeds from the deceased’s life insurance policy.
However, money or property to which the debtor is entitled after a person’s death as a result of an inheritance is not specifically exempt under either the State or Federal exemptions. In some situations, a debtor who elects to use Federal exemptions to protect their property in bankruptcy may be able to protect some, if not all, of any money or property they inherit using a special “wildcard” exemption that can be used to exempt property that is not otherwise exempt. The available wildcard exemption can be up to $15,425, and is generally dependent upon the amount of equity the debtor has in the home in which they live. Generally speaking, the less equity in the home, the greater the amount of wildcard that the debtor may use to protect the inheritance. However, under Minnesota State exemptions this special wildcard exemption does not exist. Therefore, the debtor who chooses State exemptions may not use an exemption to protect their property from creditors.
So, practically speaking, what does this mean? If a debtor files a chapter 7 case, they may need to turn over to the trustee any money or property to which they are entitled to inherit both at the time they file their case, and any money or property they become entitled to inherit within 180 days (6 months) from the day they file their chapter 7 case. This means that if someone passes away before the debtor files their case, the debtor may have to turn over any money or property that the debtor has a right to receive from the deceased person, regardless of whether or not they have actually received the property. The same is true if a person passes away within 180 days from the day the debtor files their bankruptcy case and leaves the debtor with an inheritance of money or property. In summation, in a chapter 7, any money or property inherited before the debtor’s bankruptcy case is filed, or within 6 months thereafter, must be turned over to the trustee to be paid to the debtor’s creditors, minus, of course, any portion of the inheritance which can be exempted under the wildcard exemption, if the debtor chooses Federal exemptions.
The result of becoming entitled to an inheritance is similar in a chapter 13 case for the debtor. In a chapter 13 case, the debtor is not directly required to turn over property which they cannot exempt, such as in a chapter 7 case. However, the debtor’s unsecured creditors indirectly receive the value of any property that is not exempt in a chapter 13 case in that those unsecured creditors must receive, at least, as much from the debtor’s chapter 13 payments as they would have received had the debtor hypothetically filed a chapter 7 case. So, if the debtor becomes entitled to an inheritance before they file their chapter 7 case, they can potentially exempt any portion of the inheritance that they can with their available wildcard exemption (if using Federal exemptions). The value of any nonexempt portion of the inheritance must be paid to creditors during the 3 to 5 year repayment plan. However, if the debtor becomes entitled to receive an inheritance from a person who dies at any time during their 3 to 5 year repayment plan, that inheritance will likely be viewed as “additional income” (especially if it is in the form of money, not property), and it will all likely have to be turned over to the trustee. The good thing is that the debtor may elect to dismiss their chapter 13 case if they receive a large inheritance do not wish to turn it over to the trustee. The debtor may not dismiss their chapter 7 case so easily, and must get court permission to do so (not going to happen if there is money for the creditors).
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Bankruptcy law can be complicated. That’s why it is best to first consult with an experienced bankruptcy law before filing a bankruptcy case to ensure that one’s property is best protected from creditors during their bankruptcy case. Lifeback Law firm now has a new office location at 370 Selby Avenue, Suite 224, Saint Paul, MN 55102. Come visit us there or online at lifebacklaw.com!