Chapter 13 is a form of bankruptcy that allows a wage earner to restructure debts in accordance with a three- to five-year repayment plan. Generally, all assets received by the debtor during the course of Chapter 13 plan are deemed property of the estate and therefore subject to creditors’ rights. That may or may not include inherited property, depending on how the bankruptcy court interprets the applicable law.

The Bankruptcy Code has a built-in conflict over how to treat inheritances in Chapter 13. One part of the code, 11 U.S.C. § 1306, states that the property of the debtor’s estate can include any inheritances, but another section, 11 U.S.C. § 541(a)(5)(A), says that inclusion depends on the timing of when that inheritance occurs. The following rules appear to apply:

• An inheritance received within 180 days of the Chapter 13 bankruptcy petition filing becomes part of the Chapter 13 estate and is subject to inclusion in the repayment plan.
• An inheritance received more than 180 days following the filing of the Chapter 13 petition is presumably exempt, but the court can still find that you should include them.

Most courts that have ruled on this issue have found that debtors should pay post-180-day inheritances into their repayment plan. A few other courts have held the opposite, so there is still an open question about how the two code sections should be reconciled. Bankruptcy courts in New Jersey follow the decisions of the Third U.S. Circuit Court of Appeals, which has not yet ruled on this issue, so there is no controlling local precedent on which to rely.

Here are some factors a court may consider in making its decision on whether or not to include post-180-day inheritances in a Chapter 13 repayment plan:

• How much the inheritance is worth
• What percentage is owed to unsecured creditors
• The good faith shown by the debtor during the pendency of the case
• The debtor’s financial situation and how it is affected by the inheritance

This is a confusing area of law for bankruptcy filers and every case turns in large part on its unique facts. An experienced Chapter 13 bankruptcy attorney can make the strongest case possible for excluding your inheritance from the estate.

At the Law Offices of James C. Zimmermann, we are experienced in helping debtors get the maximum benefit of a Chapter 13 bankruptcy. Please call 973-764-1633 or contact us online to schedule a free initial consultation. We have offices in Vernon, Wayne, Pompton Lakes, Hackensack and Nutley, New Jersey.