Inheritance & Life Insurance Proceeds In Bankruptcy – 4 Things To Know
In A Nutshell
1) Must Disclose In Your Bankruptcy Petition
2) Timing of Receipt of Inheritance or Life Insurance Proceeds
3) Inheritance or Life Insurance Proceeds In Chapter 7
4) Inheritance or Life Insurance Proceeds In Chapter 13
In More Detail
1) Must Disclose In Your Bankruptcy Petition
It is very important to inform your attorney of any inheritance or life insurance proceeds that you possibly may become entitled to before, during, or shortly after your bankruptcy. Obviously, inheritance and life insurance proceeds are things that often come unexpectedly, but it is important to discuss with your attorney any inclination you have about possibly receiving these things in the near future. If the likelihood of receiving these things is high, then it may dictate the type of bankruptcy your should file or keep you from filing bankruptcy altogether. The way these items are treated depends on the timing of the item being received and the type of bankruptcy you file.
Discuss your specifics with a bankruptcy attorney to learn how they affect your situation.
2) Timing Of Receipt Of Inheritance Or Life Insurance Proceeds
If you receive an inheritance or life insurance proceeds prior to the filing of your bankruptcy case, then the asset(s) will not be protected under any special exemption under North Carolina Law. You will use the exemptions available to you (I have discussed exemptions in a separate post) to keep the property if you are able. Quick example: 3 months before you file a Chapter 7 bankruptcy you receive life insurance proceeds in the amount of $10,000. The date your Chapter 7 is filed, this amount has shrunk to $8,000. You will exempt up to $5,000 of this cash through the Wildcard Exemption. The unexempt $3,000 will have to be paid into your bankruptcy to be disbursed to your unsecured creditors.
If you receive an inheritance or life insurance within 180 days of your Chapter 7 case being filed, then it becomes property of your bankruptcy estate (meaning the Court will act as if you owned this property on the day your bankruptcy was filed) and must be exempted through your available exemptions. Your Chapter 7 bankruptcy may be over in 3 months, but if you become entitled to an inheritance or life insurance proceeds 5 months (for example) from the day your bankruptcy was filed, then this property will become property of your bankruptcy estate, and your case must be reopened and the proceeds exempted with the available exemptions.
If you receive an inheritance or life insurance at any time during your Chapter 13, then it will become property of your bankruptcy estate.
3) Inheritance / Life Insurance Proceeds In Chapter 7
In a Chapter 7, all property that you are unable to exempt will be taken by the Chapter 7 Trustee and sold or used to pay for a portion of your unsecured debt. Everything you own (a/k/a your bankruptcy estate) must be exempted in order to allow you to keep your property. Your bankruptcy estate in a Chapter 7 consists of everything you own on the date you file your bankruptcy, everything you acquire during your bankruptcy, and everything you acquire within 180 days of your bankruptcy being filed (even if your bankruptcy has already terminated).
If you acquire an inheritance or life insurance during the 180 days after your case is filed, then the first thing you must do is contact your attorney. Secondly, your attorney will exempt the portion of the newly acquired property that is allowed to be exempted. Any amount that cannot be exempted will be turned over to the Trustee.
If you FAIL TO DISCLOSE the receipt of this property in your Chapter 7, then you could (1) lose your discharge (i.e. the important part of your bankruptcy that wipes away your debts) and/or (2) be held criminally liable for fraud or perjury.
4) Inheritance / Life Insurance Proceeds In Chapter 13
In a Chapter 13, typically you do not lose unexempt property to the Chapter 13 Trustee. Rather, having unexempt property will cause you to have a higher bankruptcy payment with a higher percentage being paid to your unsecured creditors. The consequences of receiving an inheritance or life insurance proceeds during a Chapter 13 will first be determinative based upon the asset(s) received.
If you receive cash through an inheritance or life insurance proceeds, then you will exempt the portion your are able to exempt. Next you will likely pay a lump sum of the unexempt portion to the Chapter 13 Trustee. For example: you receive $100,000 of life insurance proceeds. Because of your situation, you are able to exempt $2,000. The remaining $98,000 will be paid to the Trustee who will use the money to pay towards the debts you have.
If you receive non-cash property through an inheritance, then again you will exempt what you can exempt. Next your monthly payment will increase because of the unexempt property. For example: you inherit a tract of land valued at $20,000 and you have 30 months remaining in your Chapter 13 bankruptcy. Because of your situation, you are able to exempt $2,000 of the value of the land leaving $18,000 of unexempt property. Your payment will have to increase by an amount of $600 ($18,000 / 30) OR you will have to sell the land and pay the proceeds to the Chapter 13 Trustee in a lump sum.
If you FAIL TO DISCLOSE the receipt of life insurance or an inheritance in your Chapter 13, then it can cause you to be dismissed from your bankruptcy case, have your discharge revoked if already received, and/or criminal charges brought against you for fraud or perjury.
What is of vast importance is that you discuss any possibility of receiving life insurance or an inheritance with your attorney before your case is filed. Certainly, these things can (and most of the time do) come unexpectedly. But proper planning with your attorney will allow you to keep as much of the proceeds as possible while also benefiting from bankruptcy. By filling out our free online intake form, you will begin the process of allowing me to assist you in this planning process.