Most people who file bankruptcy do NOT lose anything they own that they want to keep. That’s because everything they own is “exempt,” meaning that they are all of the types of property that are protected from their creditors when filing bankruptcy. And the value of each type is no more than the maximum allowed.
One of the most important issues to deal with when considering and planning to file bankruptcy is to make sure that all of your property that you want to keep is in fact protected. This is true whether filing a Chapter 7 “straight bankruptcy” or a Chapter 13 “adjustment of debts.” Chapter 13 has extra ways to shield any property that is not exempt, but in both types of cases it’s important to know whether you have any such non-exempt property.
The starting point in determining whether all of your property is exempt is to understand what property of yours the bankruptcy court has jurisdiction, or power, over. After determining this, only then do you ask the question whether such property is exempt—protected from your creditors—or not.
Everything of yours that the court has jurisdiction over is called your “bankruptcy estate.” That has nothing to do with the usual meaning of “estate” related to a deceased person’s assets. Your “bankruptcy estate” just means the property over which the bankruptcy court has jurisdiction—which is everything you own at the time your bankruptcy is filed.
What you own and don’t own may seem straightforward enough, but the distinction can be unclear in ways that can be very important. That’s because your property—and so the property of your “estate” once you file bankruptcy—includes not just what you have immediate possession of but also what you have a right to even if it is not in your possession.
So if you own a classic car that you are restoring in your father’s barn, when you file bankruptcy of course that car would be property of your bankruptcy estate regardless where it happens to be located.
But what if your father actually owns that vehicle, yet his will states that you will inheriting it from him? Just because it’s in his will does NOT make it yours. Therefore it is not part of your bankruptcy estate, and not under the jurisdiction of the bankruptcy court.
That assumes your father is alive when you file your bankruptcy case. If you file bankruptcy after he has died, whatever you will actually be receiving through the will would be considered yours for bankruptcy purposes, and therefore part of your bankruptcy estate. That’s true even if the will has yet to go through the probate process before the title transfers to you and you can take possession of the car, or whatever else you are receiving.
Although a potential inheritance is NOT considered your property and so not part of your bankruptcy estate if you file bankruptcy at the moment that the person passing on the property to you is alive, bankruptcy law throws a very important twist into the mix here. Congress decided long ago that IF WITHIN 180 DAYS AFTER YOU FILE bankruptcy you “acquire or become entitled to acquire” an inheritance—through the death of the person from whom you are inheriting—then the property being inherited is counted as if it was your property as of the time you filed.
In other words, if someone from whom you would be inheriting anything dies within 180 days after you file bankruptcy, whatever you are inheriting is property of your bankruptcy estate, and, unless protected in some other way may be taken from you to pay your debts.
To be clear, this 180-day rule applies not only to property received by inheritance, but also by “bequest” and “devise,” plus “as a beneficiary of a life insurance policy or of a death benefit plan.”
None of these terms are defined in the Bankruptcy Code but rather are to be determined by each state’s definitions. In general, the use of the terms “bequest,” “devise,” and “inheritance” means that both real and personal property are included, whether transferred through a will or by “intestate succession”—by the laws which distributes a decedent’s assets when he or she does not leave a will.
This 180-day rule can present some awkward timing problems.
If you have a relative who you know is leaving something to you and who is not in good health, if the amount being left to you is large enough to pay off your debts and then some, you may be hoping to avoid filing bankruptcy by using the expected inheritance to pay off those creditors. In that situation you may well be trying to keep your creditors at bay in the meantime and holding off on filing bankruptcy.
But of course you have no control over either the time of death or how long after that you would actually receive the inheritance. And you may even not be getting what you expect. So simply filing bankruptcy now may make more sense, increasing the likelihood that it would be filed more than 180 days before the death.
Or if you are expecting to inherit a relatively small amount, you may well prefer that it all not go to your creditors. If so, you want to file your case more than 180 day before that person dies, which of course is usually not easy to gauge. In general you want to file sooner rather than later to increase those odds.