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Columns: Bankruptcy Adviser
Justin Harelik   Expert: Justin Harelik
Bankruptcy Adviser
Depends on where you live and how much you get
Bankruptcy Adviser

Protecting inheritance despite bankruptcy

Dear Bankruptcy Adviser,
We received an inheritance in 2006. It is now spent. How long before I would not have to mention it in a Chapter 7 filing?
-- C.J.

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Dear C.J.,
When you (or anyone else) receive an inheritance while you are in a difficult financial position, there are several factors to consider. Without knowing more of the details of your case, I can't advise you specifically. However, I'll explore a typical scenario and that hopefully will help you determine what to do next.

Suppose "Steve" is considering filing bankruptcy when a distant relative dies and leaves him a substantial sum of money. Steve's goal is to protect as much of his inheritance as possible and avoid using the money to pay off debts.

To save as much of the money as possible, Steve will have to be aware of the following things:

The state he lives in: If Steve lives in California and qualified for a Chapter 7 bankruptcy on Monday, then received $20,000 from a dead uncle on Tuesday, he could file for bankruptcy on Wednesday and still keep the $20,000. However, if Steve lived in Florida, he would probably lose at least $19,000 of that $20,000.

The amount of the inheritance: If Steve inherits more than an amount he can protect in his state of residency, then there is another set of more complicated issues to consider and Steve would be well-advised to meet with an attorney who specializes in asset protection.

The time between the inheritance and the filing: Steve might think that waiting longer to file makes it less likely that a trustee would try to seize any of his inheritance to pay his creditors. However, the trustee is less concerned with the time and much more concerned with how he spent the money.

If he is not working or on a fixed income, then it will be very possible for him to spend the majority of the inheritance on normal, everyday expenses like rent, food, car repairs, etc. and then file for bankruptcy right after the money is gone. The trustee normally will not have an issue with his case if he spent the money on legitimate expenses.

Any assets he has purchased: If Steve has purchased any asset with lasting value, such as a car or a boat, or any asset that could increase in value, such as a house or a piece of art, the trustee is very likely to go after that asset.

C.J., I hope my examination of "Steve's" situation gives you a sense for what to do. Basically, if you haven't bought any significant assets, it should be fine for you to file bankruptcy right away. If you do have assets, you may want to speak with an attorney to decide how best to protect them.

Finally, I can imagine that if you've received an inheritance, spent it and are still considering bankruptcy, you are probably in a very tight spot. Since bankruptcy filers usually face a period of unemployment, an illness or a divorce, you are doing nothing wrong when you use an inheritance to get by. Just be sure that you are not acting recklessly with credit card activity close to or at the same time you file your bankruptcy case.

Bankrate.com's corrections policy-- Posted: Aug. 14, 2007
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