Will Bankruptcy Affect Inheritance Money?

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Published February 19, 2013

| Bankrate.com

Dear Bankruptcy Adviser,

I'm in the process of filing bankruptcy. However, my husband receives Social Security and workers' compensation. My mother recently passed away, and we will be getting an inheritance of about $10,000. Will the court take the inheritance when we file bankruptcy?

-- Jackie

Dear Jackie, You and your husband receive only Social Security income and his current workers' compensation income. If that is the only income in your household, then you and your husband should easily qualify for the income portion of a Chapter 7 bankruptcy. You do need to make sure you don't have too many assets.

This inheritance is definitely an asset. You need to be careful when dealing with it. At the time of filing bankruptcy, you must disclose whether you are expecting to receive an inheritance or whether you are the beneficiary of a trust that is being administered. Most of the time, people filing bankruptcy may know that one day they will receive a small or substantial inheritance; they just don't know when. It may be months or years before any money comes. This type of speculative information does not need to be listed in a bankruptcy.

In your case, you know that $10,000 is coming. If you filed your case today, you must disclose this money in your bankruptcy paperwork. Depending on the state in which you live and what assets you are allowed to protect, you may not be able to keep that money had you filed today.

Fortunately, you did not file yet. I say that it is fortunate because now you can spend that money on you and your household before filing. You did not receive hundreds of thousands of dollars, which would be hard to spend and ridiculous to waste. Here, you received a decent amount of money, but likely not enough to pay off your creditors.

An experienced bankruptcy attorney can discuss with you how to legally and reasonably spend this money. For example, you could use it to fund a retirement account or a life insurance policy. You may be able to use some of the money for a reliable, used vehicle. Or spend the money on rent, utilities, car repairs and auto insurance. These are some legal and reasonable ways to spend the money.

You can't just hide the money in a mattress, give it to a friend or family or pay back any loans you may have with friends or family. Those are impermissible actions prior to filing. You need to be able to account for how you spend the money.

I am sure that your family can use this money for a few necessary and reasonable expenses.

If you are not able to protect the money when you file, then use it wisely, keep track of how you spend it and then file bankruptcy when you have spent the money. Don't be ashamed of spending it on your family. Good luck.

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