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Can Courts Take Inheritance to Pay Bankruptcy Debts?

Generally speaking, creditors in a bankruptcy case are not going to be sentimental about where their payment comes from, and they will gladly take whatever compensation they can get from you, regardless of the source. That said, creditors do not have access to all of your assets -- some of your property can be classified as exempt from being used for debt repayment.

But does that include an inheritance? If Uncle Joe just passed and left you some money, can a court take that money and pass it on to your creditors? And does it matter if he died before or after your bankruptcy filing?

Bequest and Bankruptcy

When you file for bankruptcy, the court will create an estate comprised of all the property or assets that can be used to repay your debts. As noted above, some assets like pensions, retirement accounts, clothing and household appliances, and other "necessities of modern life," are exempt from the bankruptcy estate. In terms of inheritance, however, the federal bankruptcy code includes in the estate:

Any interest in property that would have been property of the estate if such interest had been an interest of the debtor on the date of the filing of the petition, and that the debtor acquires or becomes entitled to acquire within 180 days after such date -- by bequest, devise, or inheritance; as a result of a property settlement agreement with the debtor's spouse, or of an interlocutory or final divorce decree; or as a beneficiary of a life insurance policy or of a death benefit plan.

So if you've received an inheritance before you file for bankruptcy, or within about the first six months after you file for bankruptcy, those funds could be used to repay your debts.

Inheritance Insurance

Unfortunately, if you're trying to protect inheritance assets in a bankruptcy, your options may be quite limited. If you have filed for bankruptcy and are expecting an inheritance (a bit morbid, yes, but still), you may ask Uncle Joe to remove you from the will, leave the money to your children or another relative, or place your inheritance into a spendthrift trust in order to protect it from creditors.

If you've already received the inheritance, shielding it from bankruptcy creditors may be more difficult and require the help of an experienced bankruptcy attorney.

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