How Bankruptcy Impacts Your Inheritance

Making the decision to file for bankruptcy can be difficult, but sometimes bankruptcy is the best answer to your financial difficulties. Filing for Chapter 7 or Chapter 13 bankruptcy can be the tool that helps you get out from under massive debt. But the process of bankruptcy isn’t easy and it comes with some hard to swallow consequences. If you are expecting to receive an inheritance soon or if you have recently been the recipient of money or property from a loved one who has passed, you need to think about what bankruptcy can do to your inheritance.

In bankruptcy, there is a 180-day rule. Once you file, the first 180 days immediately after are critical to your bankruptcy case. In this time period, whatever income you receive becomes part of the bankruptcy estate. Any inheritance you receive during this time will also become part of the bankruptcy estate and what happens to that inheritance will depend on your specific bankruptcy case. It is important to note that you do not have to actually have possession of the money or property you are entitled to in your inheritance for it to be included in the bankruptcy. As long as you become entitled to the inheritance within the 180-day time frame, it will be included in your bankruptcy.

If your spouse receives an inheritance, it is not necessarily part of the bankruptcy estate. Your spouse’s inheritance will only be included in the bankruptcy estate if you are filing for bankruptcy together. If your spouse is not included in the bankruptcy case, then the inheritance should not be included. The only way the inheritance could become part of the bankruptcy estate is if it is used in conjunction with marital assets. The best way to avoid this issue is to keep your spouse’s inheritance totally separate from any shared assets.

You are responsible for notifying the bankruptcy trustee of the money or property you are entitled to under your inheritance. Even if you fear the inheritance may be taken during the bankruptcy to pay off creditors, you cannot withhold this information. Talk to a bankruptcy attorney about when and how to notify the bankruptcy trustee. There may be specific forms you need to amend for your case depending on whether the inheritance was money, personal property, land, or a structure.

Whether or not you will be able to keep this inheritance depends on if it falls under an existing exemption. In New Jersey, you can keep up to $1,000 of personal property and up to $1,000 of furniture and household goods. You are also entitled to keep your clothing and your burial plot. If married and filing jointly, you and your spouse can double the personal property exemption to $2,000. Your bankruptcy attorney will be able to help you understand what part of your inheritance, if any, is exempt. If your inheritance is not exempt, the court will liquefy the asset to go towards paying off creditors under Chapter 7 or it will be included in the calculation for your payment plan under Chapter 13.

If your loved one passes or you become entitled to the inheritance 181 days or more after you filed for bankruptcy, it is not part of the bankruptcy estate. Under Chapter 7 bankruptcy, your inheritance is yours to keep and it will not be used to pay off creditors. Under Chapter 13 bankruptcy, however, your inheritance could be calculated into your monthly payment plan. Unless it is exempt, your bankruptcy trustee can count it as income and determine how much of it should go towards your outstanding debts.

Bankruptcy can be a confusing and difficult process. Don’t become overburdened with stress over all the little details. At Veitengruber Law, we’re experienced in handling the intricacies of New Jersey bankruptcy law. If you are concerned about how bankruptcy can impact your inheritance, we can help.

Frequently Asked Questions about New Jersey Bankruptcy

Bankruptcy FAQs

Will the recently enacted bankruptcy laws make me ineligible for a fresh start?

It’s true that Chapter 7 bankruptcy laws have made it more difficult to qualify for a fresh start, but a healthy percentage of applicants do still qualify for this type of bankruptcy. Every situation is unique, however, so the best course of action would be taking advantage of the free Chapter 7 bankruptcy consultations we offer here at Veitengruber Law. This process allows us to present you with the options that will benefit you most over the long term.

Which type of bankruptcy filing will be best for me?

If a debtor files Chapter 7 bankruptcy, the law requires that the debtor relinquish all property in excess of a set monetary limit in order that it can be liquidated through sales to creditors. However, in most of these cases, real property is exempt. This is to permit the debtor to be somewhat well positioned for a fresh start.

Chapter 11 bankruptcy is designed for business and individual debtors who have taken on immense personal debt.

Chapter 12 bankruptcy is only available to family-owned fishing businesses and family farmers.

Chapter 13 bankruptcy is usually called a “debt adjustment” since a debtor is required to file a concrete plan to repay most or all of their debts within their current income parameters.

What are New Jersey’s specific requirements for filing bankruptcy?

In order to qualify for Chapter 7 bankruptcy in New Jersey, a debtor must provide a wide array of personal information regarding their financial status. These categories include, but are not limited to: all creditors and any collection agencies, secured claims, unsecured claims, any existing debt schedules, pensions, stocks, real estate holdings, and the value of the debtor’s life insurance policy.

Once you have arranged your free consultation, the experienced team at Veitengruber Law will carefully explain the applicable filing requirements. Additionally, your bankruptcy attorney at our firm will go through this list with you to be sure you’re prepared to go forward.

Will I be permitted to keep any of my property?

When filing for Chapter 7 bankruptcy, a debtor is permitted to retain property that either state or federal law has declared exempt from the claims of creditors. The debtor is given the option to choose which set of exemptions is more advantageous, but often the federal laws are more favorable.

 

Will I be permitted to own anything once I have filed for bankruptcy?

Absolutely. It’s a common misconception that anyone who has filed for Chapter 7 bankruptcy is prohibited from owning anything. Bankruptcy is not intended to be punitive.

However, it’s important to note that if a debtor does come into an inheritance, receives a personal property settlement, or benefits from a life insurance payout within the first 180 days after filing for bankruptcy, this income or property will almost certainly be flagged as being owed to creditors unless it is specifically exempt.

Will I still be protected from discrimination despite my bankruptcy?

Federal law (No.11 U.S.C. sec. 525) protects you from discrimination from both governmental units and private employers due to your having filed for bankruptcy or failed to repay dischargeable debt.

Will I be required to appear in court?

Yes. Once you have filed your Chapter 7 petition, the court will schedule a formal Meeting of Creditors within 30 – 90 days. The Federal Court Trustee in Newark, Camden, or Trenton will conduct the meeting. Counsel will be present at your side to assist you as you answer questions intended to help the appointed trustee decide if you possess assets that should be distributed to your creditors. Additionally, the trustee will attempt to discern if you have filed your petition for Chapter 7 bankruptcy in good faith.

Will bankruptcy ruin my credit rating?

While it’s undeniable that having a bankruptcy on your credit report does damage your rating, it’s also true that over time, the bankruptcy itself can be less detrimental than a years-long history of unpaid debts and judgments against you. In fact, many people find that once they have filed for Chapter 7 bankruptcy, they receive offers for fresh credit cards and are even able to obtain them! Lenders are overall more likely to view you as less risky once you are free from your huge burden of debt. After all, they are guaranteed that you will not be permitted to file for bankruptcy for a minimum of six years.

Does bankruptcy erase my debts?

While bankruptcy will erase most of your unpaid debts, there are notable exceptions.

Bankruptcy normally does not adjust:

  • Alimony or child support obligations
  • Some unlisted debt
  • Loans obtained under false pretense
  • Fines
  • Debts resulting from willful and malicious intent
  • Student loans

Additionally, mortgages and any other liens that are not paid via the bankruptcy may be attached to the property. They will not be reattached to you personally until and unless you decide to reaccept the obligation. If the creditor sells the property, the bankruptcy completely absolves you of all obligation to repay the debt.

Are there other viable options for getting out from under my debt?

Once a debtor has been hounded by creditors and has realized that they have very little hope of paying off their debts, the promise of a fresh start through bankruptcy can seem like the only escape. While bankruptcy is the best course of option for a good portion of overwhelmed debtors, it can also greatly impact their credit rating and their ability to purchase large items such as a home or vehicle. Therefore; it is prudent for debtors to carefully consider less drastic alternatives.

This caveat is especially pertinent if the debtor’s financial problems are likely to be merely temporary, in which case creditors may accept smaller payments, or stretch payments out over longer periods of time. It helps the debtor’s credibility if they have demonstrated prompt payment habits in the past, or if they inform their creditors that they are facing potential bankruptcy. Creditors are eager to avoid bankruptcy if they may reasonably expect that the debtor will be capable of and willing to repay their debts over time; once bankruptcy proceedings have begun, they are unlikely to recover anything, or will only be able to garner a fraction of what they are truly owed. Creditors also often like to avoid court proceedings connected to bankruptcy because they are costly and time-consuming.
Veitengruber Law works with our clients to present them with every available avenue of debt relief so that they are able to make a fully informed decision. We will work together with you to get you to the other side of debt. To find out what debt relief solution is right for you, schedule your free consultation with us today.