Bankruptcy And Inheritance 

Inheritance is often a subject of discussion in many forums as many complain about the money they leave for their children and other beneficiaries is subject to inheritance taxes. Their major complaint is that they believe they have already paid income taxes on that money and it should be available to give away upon their death with the government taxing it a second time. More folks however, are often dismayed to find that bankruptcy and inheritance go together when it comes to bankruptcy court proceedings.

Bankruptcy court considers inheritance as income and if it is received within six months of a person filing for bankruptcy, the entire amount will have to be turned over to the bankruptcy court. The money received will be used by the bankruptcy court trustee to help satisfy any debt being discharged through Chapter 7 bankruptcy. Inheritance will then be treated as lump sum income by the bankruptcy court. While many may believe that inheritance should be exempt, the bankruptcy court views it as a gift and requires petitioners to pay their share of their financial obligation.

Some attorneys may have advised their bankruptcy clients in the past to have relatives essentially disown them if death appeared eminent, to prevent their share of the inheritance from being obligated to the bankruptcy court. The bankruptcy and inheritance laws are pretty straight forward and if another relative were to receive the money and hand it over to the bankrupt petitioner, they would both be violating the law.

Inheritance Also Counts As Income Before Filing

When a person is filing for bankruptcy and if, between the time the petition is filed and the time of the bankruptcy court hearing on bankruptcy and inheritance is received, the money will have to be reported to the bankruptcy court. The bankruptcy court also makes no allowances for any additional income taxes that will have to be paid by the recipient and will demand the entire amount received.

Once the money has been turned over the bankruptcy court and all creditors have been paid, should any money be left over, it can be returned to the individual. In some cases, if the petitioner files for bankruptcy, and inheritance is received, they can petition to stop the proceeding and use the money to pay their obligations.

Of course all money received through inheritance is subject to income taxes and that has to be considered when determining how much an individual can afford to pay on their bills. However if filing bankruptcy and inheritance money is received, the bankruptcy court removes any doubt about how much goes to the creditors.