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Does the inheritance go to the heir or the bankruptcy court?

Administering an estate comes with a bevy of responsibilities, and if you have agreed to act as an executor of someone's estate, you might be learning all kinds of details you never knew were applicable to estate law. Because there are so many details, it's advisable to work with a law professional when administering an estate.

One situation that you might face is an heir that has filed bankruptcy in the recent past. While you as the executor simply have to fulfill the disbursement requirements of the estate, the heir might have a question. Do they have to turn the inheritance over to the bankruptcy court to be used to pay creditors?

The answer depends on what type of bankruptcy was filed and how long ago it was filed. According to federal law, when individuals file a Chapter 7 bankruptcy, they are supposed to disclose any known or expected inheritances they'll receive. This might include an inheritance from someone who recently died or from someone who is on their death bed. Obviously, no one can tell the future, and individuals aren't required to report every person who might leave them something in the next few years.

To reduce the chance of people filing Chapter 7 just before an expected inheritance to save that money from the bankruptcy, the courts instituted a 180-day rule. If an inheritance is received within 180 days, it has to be reported. Otherwise, it does not.

Chapter 13 cases, which involve a three to five year payment plan, are different. Income changes have to be reported if they occur within the repayment period, so a major inheritance might qualify. If an heir or estate executor has any questions about how inheritances should be treated, they should speak to estate law professionals for guidance.

Source: Fox Business, "Is Inheritance at Risk With Bankruptcy Filing?," Sally Herigstad, accessed June 03, 2016

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