Last updated: October 19th, 2020
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One breath summary: Any assets you become entitled to while in the process of, or 180 days after a bankruptcy will be included in the bankruptcy estate. During a chapter 13 bankruptcy, they could be seized even past the 180 days. Talk to a qualified attorney to understand your rights and possible exemptions.
As discussed in another article, Section 541 of the Bankruptcy Code defines what assets are a part of the Bankruptcy Estate (and are, as a result, part of the bankruptcy proceedings). Generally, your bankruptcy only affects your debts and your assets that existed at the time your bankruptcy petition is filed with the Bankruptcy Court. However, like most rules, there are exceptions. Under Section 541(a)(5), the bankruptcy estate includes your rights to certain types of assets that you acquire within 180 days after your bankruptcy case is filed, namely:
- An inheritance;
- A property settlement from a divorce, or
- Life insurance benefits.
For brevity, this article will refer to an inheritance, life insurance benefits or a divorce settlement that you become entitled to after you have filed for bankruptcy protection as an “After-Acquired Asset”.
What happens if You Become Entitled to an After-Acquired Asset During your Bankruptcy?
First, you are required to notify the Bankruptcy Court and the bankruptcy trustee about the After-Acquired Asset. If you are working with an attorney, you should inform your attorney; your attorney will help you prepare the paperwork necessary to notify the Court and bankruptcy trustee.
Once you have notified the Court and bankruptcy trustee, what happens to your After-Acquired Asset? The answer depends on timing and what type of bankruptcy you have filed.
- If you become entitled to the After-Acquired Asset within 180 days after the bankruptcy petition is filed, and
- You are in Chapter 7 Bankruptcy: The After-Acquired Asset is included in the bankruptcy estate. Unless the After-Acquired Asset is protected by a bankruptcy exemption, it must be turned over to the Bankruptcy Trustee for distribution to your creditors.
- You are in Chapter 13 Bankruptcy: The After-Acquired Asset is included in bankruptcy estate. Unless the After-Acquired Asset is protected by a bankruptcy exemption, it must be turned over to the Bankruptcy Trustee for distribution to your creditors through your bankruptcy payment plan. In the alternative, you could keep the After-Acquired Asset, but you would have to increase your bankruptcy plan payments in an amount equal to the value of the After-Acquired Asset (which may make your plan payments too high for you to afford).
- If you become entitled to the After-Acquired Asset more than 180 days after the bankruptcy petition is filed, and
- You are in Chapter 7 Bankruptcy: The After-Acquired Asset is not part of the bankruptcy estate and the Bankruptcy Trustee does not have any claim against it. Your creditors also do not have any claim against it, except for any creditors whose debts are not discharged by the bankruptcy, such as student loans).
- You are in Chapter 13 Bankruptcy: The After-Acquired Asset is not part of bankruptcy estate. However, unless the After Acquired Asset is protected by a bankruptcy exemption, the bankruptcy judge or bankruptcy trustee could determine that fairness and good faith require that you include the value of the After-Acquired Asset in your bankruptcy plan, either by turning it over to the Bankruptcy Trustee for distribution to your creditors, or by increasing your bankruptcy plan payments in an amount equal to the value of the After-Acquired Asset (which may make your plan payments too high for you to afford).
Here are some things to keep in mind:
- Timing: in determining whether an After-Acquired Asset is part of the bankruptcy estate, the critical issue is the date that you became entitled to the After-Acquired Asset, not the date that you actually received the After-Acquired Asset. For example, if someone dies within the 180-day period and you become entitled to life insurance benefits, those funds becomes a part of the estate, even if you do not actually receive the funds until after the expiration of the 180-day period. The triggering event is the person’s death, not the date of your receipt of the assets.
- Some Types of Assets are Excluded from the Bankruptcy Estate: Even if you become entitled to an After-Acquired Asset, the After-Acquired Asset may not necessarily become a part of your bankruptcy estate. As discussed in another article, some assets are specifically excluded from the bankruptcy estate, such as an IRA or retirement account.
- Exemptions May Protect the After-Acquired Asset: Even if the After-Acquired Asset becomes a part of the bankruptcy estate, the After-Acquired Asset may be protected by a bankruptcy exemption.
Are there any other options for your inheritance, life insurance benefits or a divorce settlement?
- Request Dismissal of the Bankruptcy: If you become entitled to an After-Acquired Asset once you are already in bankruptcy, you could ask the bankruptcy judge to dismiss your bankruptcy case. If you are in Chapter 7 bankruptcy, it would be difficult to get a dismissal. If you are in Chapter 13 bankruptcy, the Judge may grant a dismissal. After the bankruptcy case is dismissed, you could use the inheritance, life insurance benefits or divorce settlement to pay down your debts. However, once the bankruptcy case is dismissed, your creditors are no longer subject to the automatic stay; interest will start to accrue again and the creditors may renew collections against you, including garnishment, repossession or foreclosure actions. In addition, by dismissing your bankruptcy case, you would lose any benefits of the bankruptcy, such as lien avoidance, the “cram down” of secured loans against your assets, and potential discharge of debts.
- Estate Planning: If you have not yet filed your bankruptcy and you know that you might receive an inheritance or life insurance benefits, you could suggest that, rather than leaving the inheritance or life insurance to you outright, it could be left to you in a trust in your favor. If the trust is properly constructed and includes a valid “spendthrift” provision, then the trust and its assets are immune to claims of your creditors and would not become part of the bankruptcy estate.
The issues discussed in this article are complicated and may differ depending on your particular circumstances. When in doubt, you should discuss these issues with an experienced bankruptcy attorney. If you have questions about this article, please feel free to contact us to schedule a consultation.