Bankruptcy

Can Mother's Inheritance Be Designated for Kids' Education if Mother Files Bankruptcy

By Jonathan

Last week I wrote a post about car titles.  Specifically, I discussed the issues that arise when a bankruptcy debtor's name appears on vehicle titles when theose vehicles are actually used, maintained and kept by the debtor's parents.   Now comes a similar related question about inherited money.

Blog reader Shelley writes as follows:

I am the mom in a family of 4 with a disabled husband.  Recently my father died and left me a lump sum of money. I have been told that before I can file bankruptcy, I will have to use up this money until it is  gone..which means i would not be able to give my children a head start for college or to help their families through the bad times where they cannot find work etc..is there a way around this at all?

Here is my response: if you inherit money, whether or not the money has been distributed to you, that inheritance is considered as an asset of the estate.  Under Georgia law, you can shelter some of that money - $5,400 under the "wildcard" provision, but that is it.  If you were to file Chapter 7, the trustee would seize this cash and use it to pay the claims of unsecured creditors.

What can you do?   With guidance from a lawyer you could seek to protect the inheritance money by taking advantage of available shelters.  For example, under Georgia law, an IRA may be completely exempt.   Arguably you could transfer some of that money into an exempt IRA or education IRA, which would therefore change its character from non-exempt to exempt.

You have to be very careful about doing this, however.  There can be a fine line between acceptable pre-bankruptcy planning and preparation and bankruptcy fraud.   Clearly you want to be on the correct side of this line.

This is one of those situations where you need to make an appointment and pay a knowledgeable bankruptcy lawyer to advise you as your options regarding use or spending of the inheritance money.

Full post as published by The BK Blawg on March 19, 2009 (boomark / email).