Friday, October 16, 2009

Will cash gifts, inheritance go to creditors after bankruptcy?

It's best to put off receiving cash right after you file

By Sally Herigstad

To Her Credit
To Her Credit, Sally Herigstad
Sally Herigstad is a certified public accountant and the author of "Help! I Can't Pay My Bills: Surviving a Financial Crisis" (St. Martin's Press, 2006).

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Question for the expert

Dear To Her Credit,
I filed for bankruptcy four months ago and it was final last month. I had mostly credit card debt -- about $25,000 worth, and it was all discharged in a Chapter 7 bankruptcy. I live in Utah.

My mom has cancer and isn't expected to live much longer. She is still competent at this point. She wants to leave me about $20,000, but she is afraid that if the bankruptcy court finds out about it, they will just take it to pay my creditors. My stepdad has volunteered that if my mom wills my share of the money to him for now, he will turn around and give me $20,000 next year. I trust him and know he would follow through on that promise.

Should I suggest to my mom that she write me out of her will? Or maybe she can give me one of her cars instead of money? What should I do? -- Aurelian

Answer for the expert

Dear Aurelian,
I'm so sorry to hear about your mom. What a difficult time!

Federal bankruptcy rules are pretty straightforward on this issue. If you inherit money from a person who dies within 180 days of the date you filed for bankruptcy, you must tell the courts. The money becomes part of your bankruptcy estate and is distributed among your creditors. You filed for bankruptcy four months -- about 120 days -- ago, so if your mom dies within the next 60 days and you are named in her will, you must tell the courts.

If your mom decides to rewrite her will and strike you out of it, that's her decision. David P. Leibowitz, a business and consumer bankruptcy lawyer in Illinois, says, "You can plan to a certain extent. There's nothing wrong with that." And if your stepdad decides to give you a gift next year or sooner, you don't need to worry about the bankruptcy courts taking it. The bankruptcy court cannot take gifts made after the bankruptcy is final, according to Leibowitz.

You can always disclaim an inheritance if you don't want it to go to your bankruptcy estate. You never have to accept an inheritance.

Another option would be to have your mom set up a spendthrift trust for you. A spendthrift trust is out of the reach of creditors. You'll need professional legal help to set up the trust.

"Cars are treated the same as cash," says Leibowitz. If your mom gives you a car instead of cash, it doesn't change the rules. "Even family heirlooms or a dining room set are subject to the administration of the bankruptcy estate," he says.

Just because items become part of your bankruptcy estate, however, doesn't mean they are automatically up on the auction block. You can claim an exclusion on certain items or up to certain amounts, and the bankruptcy trustee has a certain amount of discretion in choosing what to liquidate.

Planning to avoid the long arm of bankruptcy courts is not illegal or immoral. Think of it the same way you would consider tax planning. Tax planning is fine; tax evasion is not. The difference is whether you play by the rules and are honest. Trying to hide an inheritance -- for example, by not telling the courts you received $20,000 -- would be illegal, and you could face penalties for doing so. But if your mom writes you out of her will or sets up a spendthrift trust, Leibowitz says, "You didn't make that happen." You can't help it if she makes arrangements to protect what she wants to give you.

It can be difficult to talk with your mom and stepdad about money at a time like this, but you are fortunate that your family is addressing money issues now while there are more options to choose from. I hope that your mom has some good days left with you and your family, and that she can give you a gift you can keep, as she intended.