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Disposition of Inheritances Received by a Debtor During Bankruptcy

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In 2011, the debtors filed a joint bankruptcy petition under Chapter 13. Roughly nine months later, the mother of one of the debtors passed away, entitling the debtor to an inheritance of approximately $30,000.

LOS ANGELES, CA, March 12, 2014 /24-7PressRelease/ — In the case of In re Dale, the Ninth Circuit held that an inheritance that the debtor received more than 180 days following the filing date of his bankruptcy petition would not have been included in the bankruptcy estate if the debtors had filed a petition for relief under Chapter 7, but it had to be included in the debtors’ Chapter 13 case, as Congress established an expanded definition of “property of the estate” specifically applicable to proceedings under Chapter 13.

Background

In 2011, the debtors filed a joint bankruptcy petition under Chapter 13. Roughly nine months later, the mother of one of the debtors passed away, entitling the debtor to an inheritance of approximately $30,000. The debtors subsequently disclosed the inheritance to the bankruptcy court. No plan had yet been confirmed in the case.

The Chapter 13 trustee demanded that the debtors turn over the funds for distribution to their creditors. The debtors disputed the demand, asserting that the inheritance proceeds were not property of the bankruptcy estate, and, alternatively, that in Chapter 7 reconciliation proceedings the debtors would merely be required to account for the proceeds rather than being required to turn them over for distribution to the creditors.

The bankruptcy court ruled that an inheritance received by a Chapter 13 debtor before the case is closed, dismissed or converted is property of the bankruptcy estate. The court issued an order requiring the debtors to either to turn over the entire amount of the inheritance to the trustee for distribution to the creditors, or to amend the Chapter 13 plan to provide distributions to creditors in an amount which accounted for the inheritance and was sufficient to satisfy the best interests of creditors test. The debtors appealed the decision to the Ninth Circuit.

The Ninth Circuit’s ruling

The Ninth Circuit reviewed the provisions of two subsections of the Bankruptcy Code and agreed with the interpretation that was made by the Fourth Circuit in a previous case dealing with this same issue.

Under Bankruptcy Code Section 541(a)(5), Congress established a general definition for bankruptcy estates which includes rights to a bequest, devise, or inheritance held by the debtor as of the date of the filing of the bankruptcy petition, or which the debtor has acquired or becomes entitled to acquire within 180 days after that date.

Congress expanded the definition of the bankruptcy estate specifically for Chapter 13 cases under Bankruptcy Code Section 1306(a). That definition includes “all property acquired and all earnings from services performed by the debtor after the commencement of the case.”

The Ninth Circuit ruled that the bankruptcy court’s decision was correct. The inheritance received by the debtors more than 180 days after the Chapter 13 petition was filed constituted property of the debtors’ bankruptcy estate under Section 1306(a) because it was received before confirmation of a Chapter 13 plan and before the case was closed, dismissed or converted.

Individuals facing debt problems and possible bankruptcy are urged to seek the advice of a competent attorney, experienced in such matters, in order ensure that their legal rights are protected.