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Court rules inheritance part of Chapter 13 bankruptcy estate

During a bankruptcy, a Chapter 13 plan provides a debtor with flexibility in repaying some of their debts. You can pay your secured debts, like a car loan or mortgage arrears, over an extended period and you can have a significant portion or, in some cases, all of your unsecured debts discharged. In addition, you can modify the Chapter 13 plan, should your income unexpectedly be reduced.

The corollary is that should your income increase, you also have to modify your Chapter 13 plan to account for this newfound wealth. As part of the deal to obtain a discharge for some of your debts, you have may have to modify your plan and pay a higher percentage of your unsecured debt to your creditors.

A Court of Appeals recently affirmed this principle in relation to an inheritance. A debtor received an inheritance three years after their Chapter 13 bankruptcy had commenced. The trustee moved to modify the plan and include the $100,000 in payments to unsecured creditors.

The debtor objected, claiming a rule of statutory interpretation should have excluded the inheritance from the Chapter 13 plan. The bankruptcy court agreed with the trustee, and the debtor appealed.

The Court of Appeals affirmed the trustee and the bankruptcy court and ruled an inheritance received before the closing of the bankruptcy cases is part of the bankruptcy estate and available for payment for to the creditors.

The court noted that the Supreme Court has refused to interpret the Bankruptcy Act in way that "would deny creditors payment the debtor can easily make." Since an inheritance is a windfall, if you are in a Chapter 13, you can only hope that no rich uncles die prior to your discharge.

Source: United States Court of Appeals, Fourth Circuit, "CARROLL v. LOGAN," No. 13-1024, October 27, 2013

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