What Happens When a Chapter 13 Debtor Inherits Significant Assets During the Pendency of a Chapter 13 Case?

home next to stack of money depicting an inheritance

This article discusses what happens when a Chapter 13 (“Ch. 13”) debtor inherits property after the debtor’s Ch. 13 Plan has been confirmed by the Bankruptcy Court, and specifically when the debtor’s Ch. 13 Plan provides for less than a 100% recovery to the debtor’s unsecured creditors.

In a Ch. 7 proceeding, there is no legal issue or cause for a Ch. 7 case to become contested because under section 541(a)(5)(A) of the Bankruptcy Code all inherited assets are excluded from a debtor’s estate when the debtor becomes entitled to receive the inheritance more than 180 days past the filing of the Ch. 7 petition (and therefore is safe from being seized by the Ch. 7 Trustee to pay creditors). However, in a Ch. 13 case this is not clear and particularly not here in N.J. or N.Y.

11 USC § 1306(a)(1)

Under 11 USC § 1306(a)(1), all property of the kind specified in section 541, which the debtor acquires before Plan completion, becomes part of the Ch. 13 Bankruptcy estate. Some Bankruptcy and higher Federal Courts have ruled that since § 1306(a)(1) does not specifically negate the exception in section 541(a)(5)(A) (that all inheritances which the debtor acquires more than 180 days post-filing be excluded from property of the Estate), that post-petition inheritances acquired more than 180 days post-filing are excluded form a Ch. 13 debtor’s Bankruptcy estate. However, relying on § 1306(a)(1) and some less germane but relevant bankruptcy statutes, the majority of Bankruptcy Courts and several higher Federal Courts ruling on this issue around the country have nevertheless determined that inheritances which debtors acquire an interest in more than 180 days post-filing to be property of the Ch. 13 debtor’s Bankruptcy estate.

Status of the Law in New Jersey and New York on this issue

In New Jersey and New York, Bankruptcy Courts are obligated to follow prior rulings rendered by the 2nd and 3rd US Circuit Court of Appeals, respectively; this is also known as “precedent”. However, there are no published 2nd and 3rd Circuit Court decisions directly on this issue which would be controlling. Accordingly, Bankruptcy Judges in N.J. and N.Y. are not bound by the negative precedent set by the majority of other Federal Court decisions which, as referred to above, have decided that post 180-day inheritances must be included in the Ch. 13 debtor’s Bankruptcy estate.

Unfortunately for N.J. and N.Y. Ch. 13 debtors, Bankruptcy Judge’s deciding this issue are more likely to follow the more numerous Court decisions holding that post 180-day inheritances must be included in a Ch. 13 debtor’s Bankruptcy estate. However, there are other factors that could and should potentially weigh more heavily on any prospective decision to be rendered on this issue by a N.J. or N.Y. Bankruptcy judge such as 1) the particular facts of the case, e.g., how much is the inheritance, what percentage of the amount owed by the debtors are their unsecured creditors slated to receive under the current Plan, etc.; 2) the general good faith exhibited by the debtors throughout the case; 3) how much the debtors really are in need of the inheritance money and 4) a Bankruptcy Judge’s historical inclination to be pro debtor or pro creditor, etc.

The decision rendered in In re: Portell, by the U.S. Bankruptcy Court for the Western District of Missouri

In In re Portell, 557 B.R. 161 (Bankr W.D. Missouri 2016) the Bankruptcy Court for the Western District of Missouri rendered a very interesting decision in a joint Ch. 13 case where the co-debtor wife inherited a significant amount of property after the debtors’ Plan was confirmed. The In re Portell Court held that the wife’s inheritance was part of the wife’s Ch. 13 Bankruptcy estate and could be used to pay the wife’s creditors up to 100% of the wife’s pre-petition debts. However, the In re Portell Court held that the wife’s inheritance was not part of the debtor husband’s Bankruptcy estate and therefore could not be used to increase the amount scheduled to be paid to the husband’s creditors pursuant to their approved/confirmed Ch. 13 Plan. The basis for the Western District of Missouri Bankruptcy Court’s ruling was that under Missouri law a spouse’s inheritance remains his or her separate property and is not subject to be taken by the creditors of the non-inheriting spouse. With New Jersey’s and New York’s property/inheritance laws being identical (in principal) to that of Missouri, the holding of the In re Portell Court should clearly be followed here in New Jersey and New York as well.

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