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Property Received Within 180 Days of Declaring Bankruptcy

What happens to property that you’ve received 180 days before filing bankruptcy? Property that you’re entitled to receive prior to a bankruptcy filing is property of the bankruptcy estate even if the property does not actually come into your custody or control until a later date.

An income tax refund is the most common example of property you would be entitled to receive on the day you file, but do not actually receive until after the case is filed.

Generally speaking, any property that you would acquire after your bankruptcy case is filed is not part of your bankruptcy estate.

Is this always the case?

It depends. Section 541(a)(5) of the Bankruptcy Code specifically identifies three categories of property that is property of the bankruptcy estate if “the debtor acquires or becomes entitled to acquire within 180 days” after the bankruptcy filing date.

These categories are:

  1. an inheritance
  2. property you receive or have a right to receive from a marital settlement agreement or divorce decree, and
  3. death benefits or life insurance policy proceeds

The 180 day rule can spell trouble for an unsuspecting Chapter 7 debtor.

The key language of section 541(a)(5) is “acquires or becomes entitled to acquire.”

This means that the 180 day clock is not measured from the filing date to the time that the debtor actually receives the property, but rather the important date is the time when the debtor is entitled to receive it.

For example; suppose you file a Chapter 7 bankruptcy on April 1 of any given year, and your aunt dies on September 28 (within 180 days of the bankruptcy filing date), Section 541(a)(5) would be triggered, and any inheritance you’re entitled to receive from your aunt’s estate must be turned over to the bankruptcy trustee.

In this case it doesn’t matter when the money is actually received, or if you’ve already received a discharge, or even if the bankruptcy case had already closed.

In the case of an inheritance, the applicable entitlement date is when the great aunt passed away and failure to inform the trustee of the inheritance or failure to turn the money over to the trustee can be considered bankruptcy fraud by the courts of which could include a denial of discharge or even a jail sentence.

Once the trustee receives inherited money, a closed case will be reopened and the money is placed into a bankruptcy estate. Notices are sent inviting creditors to file claims, and the trustee will distribute the funds to creditors with allowed claims.

Can I contest the claims by creditors?

As the debtor, you’re entitled to contest creditor claims. In some cases, you’ll be able to keep some of the money, and in other cases some of the funds may be returned.

The problem is that the inherited property is treated the same as cash as opposed to a car or family heirloom which is property that must be turned over to the trustee for liquidation.

In some cases, you may be able to exempt inherited property and/or purchase inherited items directly from the trustee, or the trustee may consider the value of the inheritance too small or burdensome to liquidate and distribute and allow the debtor to keep all of the inheritance.

What about what I receive after the 180 days?

Courts disagree whether 180 day property (such as an inheritance) is property of a Chapter 13 estate if the debtor becomes entitled to acquire it 180 days after the bankruptcy case filing.

Some courts say that the provision of section 1306(a) incorporates the 180 day time frame of section 541(a)(5)(a) and, therefore, your interest in the probate estate is not property of the bankruptcy estate.

(See In re Key, 465 B.R. 709 (Bankr. S.D. Ga. 2012)).

Other courts hold that an inheritance received more than 180 days following petition date is property of the estate because section 1306(a) extends the 180-day period in section 541(a)(5)(a) to include any time between the commencement of the Chapter 13 case and the time the case is closed, dismissed or converted.

(See In re Carroll, No. 09-01177, 2012 WL 5512356 (Bankr. E.D.N.C. Nov. 14, 2012), aff’d Carroll v. Logan, ___ F.3d ___, 2013 WL 5781211 (4th Cir. 2013)).

But mostly, when an inheritance is received during a Chapter 13 bankruptcy, and you either choose to use the money to pay unsecured creditors in the Chapter 13 bankruptcy, pay off any unsecured creditors and close the case, or move for outright dismissal.

For states that recognize tenants by the entireties protection, the death of a spouse within 180 days of the bankruptcy filing will terminate the tenants by the entireties exemption.

The death and termination of the tenants by the entireties exemption gives the bankruptcy estate a fee simple interest in the property, and it is subject to administration by the Chapter 7 Trustee. A divorce finalized within 180 days of the bankruptcy filing would also terminate the tenants by the entireties protection. A divorce decree within 180 days of a bankruptcy filing awarding past due support could also become property of the bankruptcy estate.