Inheritances after Filing: Exemption and Chapter 13 Issues

South Florida bankruptcy attorneys know that if a debtor inherits property within 180 days after filing of the bankruptcy, that the property becomes property of the estate subject to administration by a chapter 7 trustee. More specifically, this means that if a person dies within 180 days after the bankruptcy is filed, and the debtor has the right to receive an inheritance including life insurance proceeds, that the property belongs to the bankruptcy estate even if the asset has not yet been received by the debtor.

A couple of recent cases raised issues of great concern for debtors and had favorable rulings. In re Cutiignola, 450 BR 445, (Bankr. S.D. N.Y. 2011) upheld the debtors’ claim that that they could assert their bankruptcy exemptions to protect inherited property even though they had no interest in the property at the time of filing the bankruptcy petition. The debtors could claim as exempt property including homestead and an IRA that became property of the estate as a result of inheritance. The court relied in part on a decision binding in the Southern District of Florida, In re Wilson, 694 F. 2d 236 (11th Cir. 1982)(refund of attorney’s fees to the debtor could be claimed as exempt).

What if a person dies more than 180 days after the bankruptcy is filed, does the property belong to the bankrutptcy estate? In a chapter 7, clearly no. And one would think that the same rule applies in a chapter 13. But an 11th Circuit case raises a serious concern for a debtor who inherits property during the term of the plan, which can be up to five years. In re Waldron, 536 F. 3d 1239, (11th Cir 2008). In Waldron, the court concluded that a post-petition uninsured motorist claim was property of the estate.

This inheritance issue was addressed in In re Walsh, 2011 Bankr Lexis 2602(Bankr. S. D. Ga. June 15, 2011) The court stressed that unlike an accident claim, there was a specific time period of 180 days for inheritances for property of the estate in Section 541. Walsh noted there were conflicting earlier opinions in the Middle District of Florida. Walsh upheld the debtor’s position against a claim by the chapter 13 trustee that the inheritance should be added to the bankruptcy estate.

Fort Lauderdale bankruptcy attorneys should remain concerned about the issue of inherited property in a chapter 13.

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