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Bankruptcy estate lays claim to inheritance money

Maryland residents who are considering filing for bankruptcy may be facing a new hurdle if they are expecting or have recently received a large inheritance. A new ruling out of the U.S. Court of Appeals for the Fourth Circuit states that debtors will be required to hand over inheritance money as part of their Chapter 13 bankruptcy cases. The court made the ruling in late October.

The decision relates to a case in which a couple filed for Chapter 13 protection. This is a type of bankruptcy that allows the borrower to modify debt payments so that they can meet their obligations. Creditors make a series of concessions to allow those borrowers to eventually pay off their loans and credit card debt.

In this particular case, a couple had filed for Chapter 13 protection three years before one of the partners' mothers died. That woman passed away in 2011, leaving an estimated inheritance of $100,000. The bankruptcy case was not yet closed, as the couple was just three years into their total 54-month payment plan. As a result, the inheritance was earmarked to pay unsecured claims. Even though the borrowers fought the ruling, bankruptcy courts and the appeals court agreed that the inheritance was legally mandated to pay existing debts.

Inheritances received while a Chapter 13 bankruptcy proceeding is still open will be set aside to pay existing debts. If the inheritance will satisfy the entirety of the debt, with some left over, the borrowers may get to keep some of their windfall. However, creditors take priority in this Chapter 13 situation.

This ruling may not seem fair for Chapter 13 filers who are simply seeking a financial life raft. However, bankruptcy code can be complicated. This is why filers should rely on the professional assistance of a qualified bankruptcy attorney. Those professionals can help filers learn more about their legal rights and responsibilities in the event of a large inheritance.

Source: Bloomberglaw.com, "Debtors' inheritance received before Ch. 13 case closed is property of bankruptcy estate" Diane Davis, Nov. 05, 2013

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