By Ryan C. Wood
A bankruptcy estate is created when a petition for bankruptcy protection is filed. Generally all real and personal assets you own at the time you file your bankruptcy case becomes part of the bankruptcy estate. There are certain assets that are not included in the bankruptcy estate, but today we are focusing on assets that are included. Normally all assets that you acquire after you file your bankruptcy petition are not part of the bankruptcy estate. There is an exception under 11 U.S.C. §541(a)(5) which provides if you receive property by bequest, devise, or inheritance within 180 days after you file your bankruptcy case the inheritance will be included as part of your bankruptcy estate. So if you receive an inheritance on the 181st day after you file for bankruptcy protection, it will not be part of the bankruptcy estate, right? The answer depends on what chapter of bankruptcy protection you are filing under and what jurisdiction you file in.
If you file a Chapter 7 bankruptcy case the above rule applies. It means if a loved one passes away on the 181st day after your Chapter 7 bankruptcy petition is filed and your loved one leaves you with an inheritance you do not need to let your bankruptcy attorneys know and the chapter 7 trustee has no right to re-open your Chapter 7 case to administer the inheritance.
So again, the questions is: “What Happens if I Receive an Inheritance After I File a Chapter 13 Bankruptcy Case?” If you file a Chapter 13 bankruptcy case the rules may be different. Pursuant to 11 U.S.C. §1306(a)(1), all property you acquire after your case is filed but before the case is closed, dismissed, or converted to another chapter is part of the bankruptcy estate. The interpretation between the interplay of §541(a)(5) and §1306(a)(1) is up to the various circuit court decisions and is a litigated issue.
In a recent Ninth Circuit case, In re: Dale, No. 13-1251 (B.A.P. 9th Cir. February 5, 2014), Mr. & Mrs. Dale filed for Chapter 13 bankruptcy protection on October 31, 2011. On August 11, 2012 (more than 180 days after the filing date), Mr. Dale’s mother passed away and left him an inheritance of $30,000. Their Chapter 13 case was not confirmed yet. The trustee filed a motion to dismiss the case unless the Dales turned over the inheritance to be part of the bankruptcy subject to distribution to the Dales’ creditors. The Dales’ bankruptcy lawyers tried to argue that since it was more than 180 days after the bankruptcy filing date the inheritance should not be included as part of their bankruptcy estate. The bankruptcy court disagreed and they appealed to the Bankruptcy Appellate Panel (BAP) of the 9th Circuit. The 9th Circuit BAP agreed with the bankruptcy court. The Ninth Circuit BAP agreed with a recent court case, Carroll v. Logan, 735 F.3d 147 (4th Cir. 2013). In that case, the court concluded that Congress took §541 and then expanded that definition for Chapter 13 cases to include all property and earnings acquired after the start of the Chapter 13 bankruptcy case until the case is closed, dismissed, or converted. The Ninth Circuit BAP was not persuaded by decisions from the Eleventh Circuit which support the Dales’ argument that inheritances received more than 180 days after a Chapter 13 case is filed are not part of the bankruptcy estate. Chapter 13 cases are sometimes very difficult to navigate and it becomes significantly more complicated if you factor things such as inheritances into your case. So now you know the answer to the question: “What happens if I receive an inheritance after I file a chapter 13 bankruptcy case?”
