When debts become unmanageable, filing bankruptcy may be the only option a person has for regaining financial freedom. It’s a process numerous Americans go through every year, but many are unaware of the impact it could have on their estate planning goals. As such, this is an important consideration when preparing for the future. Below are the answers to questions people have about potential conflicts between estate and bankruptcy law.

Understanding How Bankruptcy Affects Estate Planning

What happens if you’re in bankruptcy when you pass away?

If you’re involved in a Chapter 7 bankruptcy at the time of your passing, it’s possible some of your assets could be liquidated to help pay off your financial obligations. Then, your heirs would get what’s left of your property.

If you’re in the midst of a Chapter 13 bankruptcy, this means you’ve agreed to make payments on your debts for 3-5 years. The executor of your estate and beneficiaries can handle this situation by requesting the bankruptcy case be dismissed, petitioning the court for a hardship discharge, asking to convert the filing to a Chapter 7, or following through with the repayment plan.

Can beneficiaries receive an inheritance while in bankruptcy?

Should you pass away within 180 days of your beneficiary filing for bankruptcy, the inheritance must be disclosed. With a Chapter 7 bankruptcy, the inheritance may be liquidated to pay off creditors, unless it can be claimed as an exemption. In a Chapter 13 case, the inheritance will be included in the amount the beneficiary has available to make their monthly payments.  

How can you protect your assets from creditors?

Since life is full of unexpected events, you may consider certain estate planning strategies that allow you to protect your assets if you need to file for bankruptcy in the future. One way to do this is by setting up an irrevocable trust. This will transfer ownership of your assets to the trust so that you’re no longer the legal owner. Creditors aren’t able to seize property from a trust, meaning it can be distributed to your beneficiaries as intended.

Will your spouse’s inheritance be included in your bankruptcy?

As long as you file bankruptcy on your own, and the inheritance is only in your spouse’s name, it won’t be affected by your case, unless the money is combined with your marital assets. For example, it may not be viewed as separate if it’s deposited in your joint account, or your spouse uses part of it to buy you an expensive gift.

If you have yet to get your affairs in order, trust Luke A. Weiland, Attorney at Law to help you protect your legacy and loved ones. He’ll guide you through the estate planning process from beginning to end, ensuring you’ve thought about every important detail. Located in Wisconsin Rapids, WI, this law firm is dedicated to providing clients with personalized service and honest legal advice. Call (715) 422-6808 to schedule a consultation, or visit this experienced attorney online.