One of the things that surprises people about bankruptcy is that you can file bankruptcy, do everything you’re supposed to do, and then find out that an inheritance you receive afterward may have to be turned over to the bankruptcy trustee.

Most people assume that once they file bankruptcy, their financial situation is determined as of the filing date. They list their assets, disclose their debts, attend their meeting of creditors, and wait for their bankruptcy discharge.

But there is an important exception to that general understanding.

It’s called the 180-day rule, and it can make a significant difference in what happens to money or property you inherit after filing bankruptcy.

In my 35-year career practicing bankruptcy law, I have represented more than 25,000 clients. I have seen this situation arise, although only a handful of times. It isn’t something that happens in most cases, but it absolutely can happen, and it’s important to understand the rules before you find yourself in that position.

The 180-Day Rule: The Bankruptcy Filing Date Matters

Under Section 541(a)(5) of the Bankruptcy Code, certain property acquired or becoming available to a debtor within 180 days after filing bankruptcy becomes property of the bankruptcy estate if it is received through an inheritance, a qualifying divorce-related property settlement or decree, or as the beneficiary of certain life insurance policies or death benefit plans.

Let’s concentrate on inheritances.

Suppose you file a Chapter 7 bankruptcy case on January 1. Your mother passes away on March 1, and you are entitled to inherit $75,000 from her estate.

Even if the probate estate doesn’t distribute the money until several months later, the inheritance may become property of your bankruptcy estate because your entitlement arose within 180 days after your bankruptcy filing.

In other words, the date you actually receive the check is not necessarily what determines whether the inheritance is part of your bankruptcy estate.

The timing of the death and when you become legally entitled to the inheritance can be much more important.

The same issue can arise if you inherit a house, land, investments, or another valuable asset instead of cash.

What If I Inherit Money More Than 180 Days After Filing?

Generally, an inheritance that you first become entitled to receive more than 180 days after filing a Chapter 7 case is not brought into the bankruptcy estate by this particular 180-day rule.

For example, suppose you file bankruptcy on January 1, and a relative passes away in August, after the 180-day period has expired.

The inheritance generally would not become property of the bankruptcy estate under Section 541(a)(5) merely because you inherit it.

However, I would caution you not to rely on a simple calendar calculation without discussing the facts with your bankruptcy attorney. The date you become entitled to the inheritance can be more important than the date the money is distributed, and other legal issues can affect the analysis.

If someone dies during the 180-day period, contact your bankruptcy attorney promptly—even if you have not received any money yet.

What Are My Duties If I Inherit Money After Filing Bankruptcy?

This is where people can get into trouble if they don’t understand their responsibilities.

If you learn that you may be entitled to an inheritance during the 180-day period, you should notify your bankruptcy attorney immediately.

Don’t wait until the probate estate closes. Don’t wait until the trustee contacts you. And don’t assume that the inheritance is yours to spend simply because the money has not yet arrived.

Your attorney can determine what disclosures and filings are required, including whether supplemental schedules must be filed, and can communicate with the bankruptcy trustee as appropriate.

You must provide accurate information about your inheritance and cooperate with the bankruptcy process. Depending on the circumstances, the trustee may be entitled to recover nonexempt inheritance property for the benefit of creditors.

You should not conceal the inheritance, transfer it to a family member, give it away, or spend it to avoid the trustee’s interest.

The safest course is to preserve the funds or property until you receive legal advice about how it should be handled.

What Does the Bankruptcy Trustee Do?

In a Chapter 7 case, the trustee has a legal duty to investigate the debtor’s financial affairs and collect and liquidate nonexempt property belonging to the bankruptcy estate when doing so serves the estate’s interests.

That responsibility does not necessarily end just because the trustee initially determines that there are no assets available for creditors.

For example, a trustee may review your bankruptcy petition, conduct your meeting of creditors, and determine that all your property is exempt or otherwise unavailable for distribution to creditors.

The trustee may then file what is commonly called a Trustee’s Report of No Distribution, sometimes referred to as a no-asset report.

But suppose the trustee later learns that you became entitled to a $100,000 inheritance within the 180-day period.

If the inheritance is not fully protected by applicable exemptions and has sufficient value to justify administration, the trustee will likely revisit the no-asset determination and withdraw or amend the Report of No Distribution.

The trustee may then take the steps necessary to administer the inheritance for the benefit of creditors.

This can include requesting documents, determining the value of the inherited property, reviewing applicable exemptions, and arranging for the recovery or liquidation of nonexempt assets.

The fact that the trustee previously filed a Report of No Distribution does not automatically mean the trustee has lost the ability to administer subsequently discovered property that belongs to the bankruptcy estate. The trustee will likely reopen the case, if it is closed, and withdraw their report of no distribution.

Does the Trustee Get to Keep the Entire Inheritance?

Not necessarily.

This is an important distinction.

The trustee does not automatically get to keep every dollar or every asset you inherit. The analysis depends on the nature and value of the inheritance, any valid liens, applicable exemptions, and the costs and benefits of administering the property.

Michigan bankruptcy exemptions may protect some property, depending on the circumstances and the exemption provisions available to you.

For example, if you inherit $20,000, that does not automatically mean the trustee is entitled to distribute the entire $20,000 to creditors.

Your attorney must determine whether an exemption applies, how much property is protected, and whether any nonexempt value remains for the trustee to administer.

If the inheritance consists of real estate, the analysis can be more complicated. The trustee may need to determine the value of the property, any mortgage or other liens, your ownership interest, applicable exemptions, and whether a sale would benefit the estate.

The important question is not simply how much you inherit. It is how much, if any, is available to the bankruptcy estate after applying the relevant law.

What Happens to My Bankruptcy Discharge?

An inheritance does not automatically mean that you lose your bankruptcy discharge.

The administration of an inheritance and the granting of a discharge are related to the bankruptcy case, but they are separate issues.

Depending on the circumstances, the trustee may administer the inheritance while the case proceeds toward completion, or additional steps may be required after the discharge has already been entered.

The trustee’s recovery of nonexempt property for creditors does not, by itself, mean that the discharge is automatically revoked.

However, failing to disclose an inheritance, concealing property, or disobeying a court order can create serious problems. The consequences depend on the facts and applicable law.

That is why I emphasize the importance of contacting your attorney as soon as you learn about a possible inheritance.

What If the Trustee Already Filed a Report of No Distribution?

This is one of the most important practical points.

Many Chapter 7 debtors assume that once the trustee files a Report of No Distribution, the trustee is finished with their case and will never have any further interest in their property.

That is not necessarily true.

If a substantial, nonexempt inheritance becomes property of the bankruptcy estate, the trustee will likely withdraw the no-asset report and begin administering the asset.

The bankruptcy court may issue additional notices, and creditors may be given an opportunity to file proofs of claim if a distribution becomes possible.

The trustee will then follow the required procedures to determine which claims are entitled to payment and how the available funds should be distributed.

The trustee is not simply collecting the money for personal benefit. The trustee’s role is to administer estate property according to the Bankruptcy Code and distribute available funds to eligible creditors in the required order of priority.

Does This Rule Apply to Chapter 13 Bankruptcy?

Chapter 13 cases can involve additional considerations.

Chapter 13 is different from Chapter 7 because the debtor generally makes payments under a court-approved repayment plan rather than having a trustee liquidate nonexempt assets in the same manner as in Chapter 7.

An inheritance may affect a Chapter 13 case, depending on when the inheritance arises, the terms and status of the plan, the debtor’s circumstances, and the applicable law.

If you receive or become entitled to an inheritance while in Chapter 13, notify your attorney promptly. Your attorney can determine whether the inheritance must be disclosed and whether the plan, payments, or other aspects of the case may need to be addressed.

Do not assume that the Chapter 7 and Chapter 13 rules are identical.

My Advice: Don’t Make Any Assumptions

In more than 35 years of practicing bankruptcy law and representing over 25,000 clients, I have learned that no two financial situations are exactly alike.

An inheritance after filing bankruptcy is not an everyday occurrence, but I have seen it happen. And when it does, the financial consequences can be substantial.

If you are filing bankruptcy, or have already filed, and a relative passes away or you learn that you may inherit money or property, contact your bankruptcy attorney immediately.

Don’t assume the inheritance is yours to spend. Don’t assume that the trustee has no further interest because a Report of No Distribution was filed. And don’t assume that you can avoid the rules simply because the probate process has not yet paid you.

The 180-day rule can make the difference between keeping an inheritance and having some or all of its nonexempt value administered for creditors.

The bottom line: If you become entitled to an inheritance within 180 days after filing bankruptcy, the inheritance may become property of your bankruptcy estate. Prompt disclosure and proper legal advice can help you understand your rights, protect any available exemptions, and avoid unnecessary problems with the bankruptcy court or trustee.