Often the focus in bankruptcy is on debt; however, persons considering filing for bankruptcy should also keep in mind any possible sources of income. Because the bankruptcy process can take several months or even years, it is possible for the debtor to come by unexpected sums of money, such as an inheritance. When this happens, the inheritance may be treated differently, depending on the type of bankruptcy. In some instances, the debtor may keep the inheritance, and in others they may have to pay some or all of it to their creditors. Even worse, failure to follow the law can result in a bankruptcy case being dismissed. An experienced Bay Area bankruptcy attorney can help you comply with the law and decide which type of bankruptcy is best for you.

180-Day Rule in Chapter 7 Bankruptcy

Chapter 7 bankruptcy allows a debtor to get rid of much of their unsecured debt. In exchange, the debtor must liquidate their nonexempt assets and divide the proceeds among their creditors. Chapter 7 has a 180-day rule that allows the debtor to keep inheritance received more than 180 days after the bankruptcy filing. The 180-day rule is contained in Section 541(a)(5) of the Bankruptcy code: (5) Any interest in property that would have been property of the estate if such interest had been an interest of the debtor on the date of the filing of the petition…or…within 180 days after such date – (A) by bequest, devise, or inheritance; (B) as a result of a property settlement agreement with the debtor’s spouse, or of an interlocutory or final divorce decree; or (C) as a beneficiary of a life insurance policy or of a death benefit plan. Courts are split as to whether the 180-day rule is relevant in other bankruptcy chapters. This month though, the Ninth Circuit held that the 180-rule does not apply in Chapter 13 Bankruptcy.

The Ninth Circuit’s Decision in In re: Dale

The Dales filed a Chapter 13 Bankruptcy petition in October 2011. However, they were unable to confirm their Chapter 13 Bankruptcy plan. In August 2012, the Dales inherited a significant sum of money. However, the Dales did not turn the inheritance over to the Bankruptcy Estate and failed to make payments under their proposed plan. As a result, the Trustee filed a motion to dismiss the bankruptcy case. The Dales then suggested that they use the unspent portion of the inheritance to make the remaining payments.

The Bankruptcy Trustee argued that the Dales’ bankruptcy case should be dismissed because they failed to disclose and turn over the nonexempt inheritance proceeds. However, the Dales disagreed and argued that the inheritance proceeds were not part of the bankruptcy estate because they were received more than 180 days after the filing of the bankruptcy petition. The issue in the case involved section 1306 of the bankruptcy code, which details the property that belongs to the bankruptcy estate.

Section 1306 reads in part:

(a) Property of the estate includes, in addition to the property specified in section 541 of this title…

The Dales argued that the reference to section 541 should incorporate the 180-day limitation on inheritance. However, the Ninth Circuit was unpersuaded and followed case precedent from the Fourth Circuit holding that inheritance received greater than 180 days after the filing of a Chapter 13 Bankruptcy was property of the bankruptcy estate.

The Law Offices of Melanie Tavare is a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code