Rarely does a person first turn to thoughts of bankruptcy when financial trouble starts. More commonly, a person will take a number of steps to get the situation under control, but regaining financial stability is not always possible. Sometimes contributing factors compound an already low income and generate higher expenses, such as a job loss coupled with complex medical issues. Thus, most people approach bankruptcy when other options are not viable, and income and available assets are far below the level needed to meet expenses.
Typically, when the bankruptcy court evaluates a debtor’s eligibility for Chapter 7, which has an income restriction, it only looks at the debtor’s financial situation at the time the petition is filed. Usually, Chapter 7 debtors get to keep all their property because everything qualifies as exempt under the law. Only assets and income available prior to the bankruptcy petition are considered part of the case, and anything acquired or earned after filing is not included in the debtor’s estate (what can be used to repay debts). Thus, property obtained post-petition is normally clear from creditors’ claims. However, special rules apply to inheritances that can greatly affect the outcome of a bankruptcy case. A discussion of how the law treats inheritances for purposes of bankruptcy will follow below.
Clarifying What Qualifies as a Pre-Petition Asset
When someone thinks about what assets he or she owns, common sense would say that something is only an asset if the person is in possession of the item and is free to use it. However, the law says that any property in which a debtor has a “legal or equitable interest” as of the time the petition is filed is considered part of the debtor’s estate, regardless of where the property is located or who has possession of it. What this means in practical terms is that if a person has a legal right to property, such as under the terms of a will, assuming the previous owner is deceased, this item is part of the bankruptcy estate. This rule applies even if a person does not know that he or she is entitled to the property, or if the person cannot take possession until certain legal requirements are first satisfied.
Inheritances
Turning specifically to inheritances, a person does not have a legal interest in property before the bequeather dies. Thus, just because someone is named in a will does not mean the expected inheritance is already considered to belong to him or her. Until the person who created the will dies, the inheritance is just a possibility, and is not actually his or her property. However, if the inheritance is realized before or within six months of filing a bankruptcy petition, the law says this windfall is part of the bankruptcy estate and subject to creditor claims. This rule applies to any property received as a result of someone else’s death, including life insurance proceeds, trust distributions, or death benefits from a family member’s retirement plan.
Naturally, no one wants an inheritance to go towards paying off creditors, and if a person is anticipating receiving one soon because a family member is in poor health, filing bankruptcy at the right time is critical. Determinations such as these are one of many reasons an experienced bankruptcy attorney should be consulted before a petition is filed.
Consult a Bankruptcy Attorney
The bankruptcy process is complex, and mounting the best possible case involves a number of considerations that only an experienced bankruptcy attorney knows how to make. Attorney Christopher L. Arrington knows how difficult deciding to file for bankruptcy is, and is committed to helping his clients obtain the clean financial slate they need to move forward. If you live in Danville, Avon, Plainfield, or the surrounding area, contact his office today to schedule an appointment.