People who file Chapter 7 bankruptcy or Chapter 13 bankruptcy should consult an attorney with questions about inheritance assets after bankruptcy. Consult with Lanigan and Lanigan, P.L., to be advised of the laws that will affect how inheritance assets of money or real property will be handled after bankruptcy. It will not be a happy experience.
The irony is that if the inheritance had been awarded prior to making the decision to file, the debtor may have had sufficient assets to cover outstanding debts. Nevertheless, it’s a case of too little, too late and now the courts have the last word.
Debtors Prohibited From Concealing Assets
When a cash-strapped consumer comes into large sums of money, it can be a cause to celebrate or be depressed. Federal inheritance tax laws prohibit debtors from concealing assets, including monies or property legally and rightfully willed to them.
Bankruptcy is a legal means of providing consumer debt protection for individuals seeking relief from overwhelming financial woes. Without proper monetary management and sound financial planning, anyone is subject to become bankrupt.
Unless an individual has a contingency fund, an unexpected illness, chronic unemployment, or credit card abuse can all push a consumer over the edge and into bankruptcy. U.S. Bankruptcy law does not strip an indebted individual of all assets, but there are some concessions that have to be made to satisfy creditors.
The law allows debtors to retain Social Security payments, VA benefits, unemployment compensation and certain property deemed exempt by the court. However, when it comes to an inheritance after bankruptcy or other windfall gain, the courts will exercise the right to legally seize additional income to fulfill debtor obligations.
When individuals can’t learn good money management, they sometimes find themselves in a position of having to give the government monies they would rather keep, but the law is the law and it is meant to be observed.
Chapter 7 Bankruptcy Liquidates Assets
In a Chapter 7 bankruptcy proceeding, court-appointed trustees liquidate debtor assets, less exemptions, to repay outstanding debts to creditors. In a Chapter 13 proceeding, wage earners with a steady income are required to participate in a structured payment plan which must meet the approval of the court and creditors.
If a debtor inherits money or property within 180 days (or 6 months) after filing, these assets automatically become part of the debtor’s estate and can be seized, liquidated and distributed to creditors.
Inherited assets increase the Chapter 13 debtor’s disposable income and the original repayment plan would also have to be adjusted to reflect the increase. Debtors who are beneficiaries of a decedent’s estate may look upon an inheritance as a blessing, since there may be additional funding available which may help expedite creditor payments.
Assets derived from heir property may be sufficient to settle all outstanding debts and help debtors get back on the road to financial recovery. Depending upon the amount of indebtedness at the time of filing, money willed to the debtor could even shorten the time needed to repay creditors and alleviate the drain on the wage earner’s paychecks.
Federal estate taxes are assessed against property willed by individuals who have died before being transferred to beneficiaries. Estate taxes are computed based on the cumulative value of the decedent’s property owned before death, less deductions; and paid to the federal government by the executor of the decedent’s estate.
Even if a decedent’s estate has a pre-existing federal tax lien, the Trustee’s right to seize assets overrides the lien. Once inherited assets have been liquidated and distributed to satisfy creditors, the debtor will be the last in line for payment, if anything is left. If most or all of the outstanding debts are paid, the inheritance will have been well spent; and the debtor will be well on the way to financial recovery and a second chance for a debt-free life.
When the estate is transferred as heir property, beneficiaries are required to pay inheritance, or death taxes. But federal inheritance tax laws allow individuals to bequeath up to $1,050,000 to heirs without incurring an estate tax; therefore, most heir property is estate tax free.
States generally follow the leading of federal laws in imposing an inheritance tax on beneficiaries.
Beneficiaries expecting an inheritance must consult with the Lanigans to determine the amount of tax and familiarize themselves with the laws of their resident state. Federal inheritance tax laws and U.S. bankruptcy codes state a beneficiary who filed for consumer debt protection must willingly report an inheritance after bankruptcy to the trustee as part of the estate.
Debtors Can Lose Inheritance in Bankruptcy
In addition to liquidating debtor estates to pay creditors, trustees are charged with the responsibility of locating all disposable income and assets. Inherited assets are distributed using an attorney and legal instruments, usually the decedent’s last will and testament. Once a will has been probated, a procedure which determines its validity, it becomes part of the public record — fully accessible to all beneficiaries, trustees and creditors.
Bankruptcy Trustees can force debtors to relinquish an inheritance after bankruptcy in an effort to exercise the federally-mandated right to collect debtor assets.
Although it may take months and sometimes years to settle a decedent’s estate, once a debtor receives assets left to him, federal inheritance tax laws mandate that money and property be turned over to the courts for distribution to pay unpaid debts.
Attempting to hide an inheritance after bankruptcy constitutes concealment of assets, a federal charge of bankruptcy fraud, punishable by imprisonment.