Attorney at Debt Advisors Law Offices
Practice Areas: Chapter 7 Bankruptcy, Chapter 13 Bankruptcy, Stop Foreclosure
Filing for bankruptcy already brings many questions, but things can get even more complicated when an inheritance is involved. While receiving money or property might feel like a relief, the timing, type of bankruptcy, and state exemptions will determine whether those assets stay with you or become part of your bankruptcy estate.
This guide explains how inheritance interacts with Chapter 7 and Chapter 13 bankruptcy, the role of the 180-day rule, and strategies that may help you protect inherited property.
An inheritance is considered part of your overall assets, but whether you can keep it depends on several factors. Under the U.S. Bankruptcy Code, specifically 11 U.S. Code §541(a)(5), inheritances received within 180 days of filing bankruptcy may be added to your bankruptcy estate. That means those assets could be used to repay creditors.
The type of asset also matters. Cash, property, or investments can all be handled differently depending on whether they are exempt or non-exempt. Federal and state laws set limits on what can be protected. In Wisconsin, for example, debtors may choose between state and federal exemptions, and these decisions directly affect what happens to an inheritance.
Under the U.S. Bankruptcy Code (§541(a)(5)), inheritances received within 180 days of filing are considered part of the bankruptcy estate.
Failing to disclose an inheritance can have serious consequences. Courts may treat nondisclosure as fraud, which can result in dismissal of your case or denial of discharge.
Chapter 7 bankruptcy is often called “liquidation bankruptcy” because non-exempt assets can be sold to repay debts. If you inherit property or money before filing or within 180 days after filing, those assets can be pulled into the bankruptcy estate. This could mean liquidation of the inheritance to satisfy creditors.
Timing is especially important here. If you receive an inheritance after your case is discharged and the 180-day window has passed, it generally is not included in the estate. But if it falls within the timeframe, creditors may have rights to it.
Example: If you file for Chapter 7 bankruptcy in January and inherit $30,000 in April, the inheritance falls within the 180-day rule and is likely part of the bankruptcy estate.
Chapter 13 bankruptcy works differently. Instead of liquidation, debtors follow a repayment plan lasting three to five years. Inherited property or money does not usually get sold, but it can affect how much you have to pay back through your plan.
If you receive an inheritance during your repayment period, the trustee may ask to adjust your plan payments to reflect the added income. This does not always mean losing your inheritance, but it could increase the percentage of debts you must repay.
Bankruptcy exemptions vary by state. In Wisconsin, debtors can choose between state and federal exemptions, which may determine whether inherited assets are protected.
The date you file for bankruptcy and the timing of an inheritance are crucial. There are three main scenarios to understand:
Failure to disclose an inheritance during bankruptcy may be considered fraud and can result in dismissal of the case.
|
Timing of Inheritance |
Chapter 7 Impact | Chapter 13 Impact |
Key Consideration |
| Before filing | Becomes part of estate | Added to repayment plan | Must disclose before filing |
| Within 180 days after filing | Becomes part of estate | May alter repayment plan | Controlled by §541(a)(5) |
| After 180 days & after discharge | Typically not included | Generally excluded | Depends on case closure & plan status |
For additional details, see the U.S. Courts Bankruptcy Basics guide.
Exemptions are critical tools for protecting inherited assets. Depending on the laws you choose, certain property may be exempt up to a dollar amount. For example, federal exemptions may cover part of a homestead, retirement accounts, or specific personal property. Wisconsin offers its own set of exemptions, which can sometimes be more favorable depending on your situation.
At this stage, many people benefit from speaking with a Wisconsin bankruptcy attorney to understand how state and federal exemptions apply to inherited assets. The right approach can determine whether property is preserved or becomes part of the bankruptcy estate.
Trusts also play a role. Assets in irrevocable trusts may not be considered part of your bankruptcy estate, whereas assets in revocable trusts often are. While trusts can provide protection, courts will scrutinize transfers into trusts made to avoid creditors.
An inheritance does not erase outstanding debts by itself. In Chapter 7 in Wisconsin, inherited funds can be used to pay creditors if they are included in the estate. In Chapter 13, they may change the repayment plan, meaning you could end up paying back more than originally required.
Not all debts are dischargeable, even with an inheritance. Obligations like student loans, child support, and certain taxes generally remain regardless of bankruptcy status. The way inherited assets interact with these debts depends on federal law and your state’s exemptions.
For further reading, review the U.S. Department of Justice Bankruptcy Resources.
Not always. Timing, exemptions, and type of bankruptcy decide whether creditors can access inherited assets. Disclosure is essential to avoid complications.
It requires inheritances received within 180 days of filing to be included in the bankruptcy estate and possibly used to pay creditors.
Yes. Depending on whether you use state or federal exemptions, inherited property may be partly or fully protected from creditors.
An inheritance may increase disposable income, and trustees can modify repayment obligations to ensure creditors receive fair amounts.
Irrevocable trusts may shield assets, but revocable trusts usually do not. Transfers into trusts to avoid creditors can be challenged.
Non-disclosure may be treated as fraud, leading to dismissal of your case, loss of discharge, or legal penalties.
Inheritance and bankruptcy often intersect in ways that surprise people. The timing of when you receive assets, the chapter of bankruptcy you file under, and whether exemptions apply all determine what happens next. Some inheritances may be protected, others may become part of the bankruptcy estate, and Chapter 13 cases may require repayment adjustments.
Being proactive about disclosure, understanding the 180-day rule, and knowing how exemptions or trusts apply can make a major difference. While every case is unique, having clarity on these rules helps protect your financial future.
Debt Advisors Law Offices provides guidance to individuals across Wisconsin who are navigating bankruptcy and financial challenges. If you are concerned about how an inheritance may affect your case, our attorneys can help explain your options and guide you through the process with care and experience.
Learn about bankruptcy protections, types of bankruptcy, how to get started, what to expect, and who to trust. Filing bankruptcy is the ONLY way to completely eliminate debt. If bankruptcy is right for you, it offers powerful protections that cannot be achieved through alternative solutions such as hardship relief, loans, or debt settlement.
