Bankruptcy can complicate estate planning and inheritances. Chapter 7 and 13 bankruptcies make it harder for families and partners to get the money that was left for them in an estate. A bankruptcy estate can take ownership of an entire estate if the debt is large enough.

Dealing with a person’s bankruptcy after his or her passing can be a difficult task. An experienced estate attorney can help surviving beneficiaries work through the process of processing debts and allocating remaining inheritances.

Navigating a Bankruptcy

Bankruptcy is an unpleasant but often necessary procedure for those who find themselves buried in debt that exceeds their assets. Filing for bankruptcy is not as simple as having the government wipe the slate clean, however.

The bankruptcy code contains nine chapters, but most people will file either Chapter 7 or Chapter 13 bankruptcy. Cases must be filed in a United States Bankruptcy Court where a judge rules on liquidating assets to pay the debtor’s creditors. This process can be handled without a lawyer, but many people hire a bankruptcy attorney to walk them through the process and save as many of their assets as possible.

How Chapter 7 Bankruptcy Affects an Inheritance

If a person files under Chapter 7 of the bankruptcy code, his or her creditors are paid via the sale of the debtor’s assets. If an individual inherits money after filing Chapter 7, the money is used to pay the debt. The inherited property will likely be liquidated and paid to the person’s creditors.

However, if someone inherits money 180 days after filing bankruptcy, the inheritance becomes his or her own property.

How Chapter 13 Bankruptcy Affects an Inheritance

Chapter 13 bankruptcy is less severe than Chapter 7. In this variation, a person’s debts are adjusted through some kind of payment plan. Additionally, the debtor is allowed to keep certain property.

Because of the uniquely tailored payment plans, it can be difficult to deal with a deceased person’s Chapter 13 bankruptcy estate. Many families renegotiate the terms of bankruptcy to make it easier to manage.

A judge may switch the bankruptcy to a Chapter 7 filing, allowing the beneficiaries to liquidate assets to satisfy the bankruptcy terms. For individuals who are struggling to meet a bankruptcy’s financial obligations, an attorney may be able to successfully file a hardship discharge from the Bankruptcy Court.

Bankruptcy and Estate Planning

Bankruptcy can disrupt a person’s plans to leave money for his or her spouse or relatives. A person’s Last Will and Testament is part of an estate plan that provides direction for distributing assets upon death. Until a person’s debts are paid, however, his or her assets will not make it to the inheritors.

This is especially true of Chapter 13 bankruptcy when the payments to creditors are too high to manage. If someone has reason to believe he or she is near the end of his or her life, and he or she needs to file bankruptcy, Chapter 7 is a better bet to ensure the family doesn’t get saddled with debt.

For those nearing retirement age, this should be read as a cautionary tale: paying off debt is an essential part of estate planning. A court-controlled bankruptcy estate can tie up an estate’s funds for years.

Tools to Help with Bankruptcy

Knowledge is power when filing bankruptcy, and attorneys and bankruptcy trustees are two of the best resources available. An individual should be well-informed about the specific chapter under which he or she is filing, as well as the financial, credit, and inheritance ramifications.

Whether someone is planning his or her estate or attempting to collect money he or she has inherited, bankruptcy trustees can offer helpful advice.

If the bankruptcy court is unhelpful, or the trustee is too inflexible, a bankruptcy attorney can help explain these legal labyrinths.