Protecting inheritance from bankruptcy

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Dear Bankruptcy Adviser,
My husband has separate credit cards from me and wants to file for bankruptcy because he is unable to keep up with the minimum payments. I have an inheritance coming from my mom’s estate and am very concerned about losing this.
— Becky

Dear Becky,
You ought to be very concerned about your pending inheritance. Questions could be raised about it in your husband’s bankruptcy. You should seek competent legal advice prior to your husband’s filing. It’s too important to leave to chance.

Your husband could be unable to file if you receive a significant inheritance and you don’t spend or protect it properly. Whether you’re still married, separated or divorced, you will want to make sure that if potential questions are raised about your inheritance, you’re prepared with detailed documentation on your spending. That’s where an experienced bankruptcy attorney can point you in the right direction.

You may ask why it is necessary to disclose your separate inheritance in your husband’s bankruptcy if it’s separate property. In a community property state — there are nine in the U.S. — what is yours, is his and vice versa. There are exceptions such as an asset deemed as separate property, and your inheritance likely would be categorized as your separate property. The other 41 states and the District of Columbia are considered common law states. You may also have the ability to protect the inheritance as your separate and distinct property there.

Still, the worst thing you could do is try to hide the asset or attempt to delay distribution of the money until after your husband’s case is completed.

Each state is different when it comes to protecting assets, and I can only provide very general information regarding how to protect an inheritance. Making it more complicated, each federal court district in every state has very particular legal opinions about protecting assets.

In some districts, spending a separate inheritance isn’t even an issue. In others, spending any of the inheritance prior to filing could be deemed improper. For example, let’s say you are receiving $50,000 from your mother’s estate. You could reasonably spend that money on your mortgage payments, car insurance, life insurance policies and other reasonable expenses. But it should be noted that a 55-inch plasma TV would not be reasonable.

So, in some districts, you must be careful in the manner and time frame in which you spend inherited money. But you also must take care to avoid converting your separate property inheritance into the community property of your household. This happens when you commingle assets. Buying a car for your spouse with your inheritance could mean the car would not be protected because separate property was used for the benefit of the community.

Now you can see why this can be a complicated legal matter. You can spend the inheritance over a specific period of time and your husband could still be eligible for bankruptcy if you’re careful to spend the money properly. A competent bankruptcy attorney should let you know what is legal, or illegal, in your area.

However, if your husband tries to file for bankruptcy within weeks or months after you receive the inheritance, the person assigned to your case, called a trustee, could raise questions. No matter when your husband ultimately files bankruptcy, be prepared for an investigation. It’s a good idea to track every single penny of the money you spend. The trustee may ask for a detailed expense report.

You are right to be concerned. Explore all options prior to moving forward with your husband’s bankruptcy. Debt settlement, credit counseling and bankruptcy should all be considered before your husband makes a final decision on bankruptcy. And seeking legal advice should get you to the best results about your inheritance.

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