What Happens To Inherited Property In A California Bankruptcy?

Bankruptcy is stressful enough on its own. Toss in the thought of inheriting money or property while you’re in the middle of it, and things can get confusing fast. 

You might wonder: do you get to keep the inheritance, or does it all go to your creditors? 

The truth is, it depends on timing, the type of bankruptcy you filed, and California’s exemption rules.

In this post, we’ll explain what happens to inherited property in a California bankruptcy in detail.

The 180-Day Rule Explained

This is the big rule you need to know right away: the 180-day rule. 

Basically, if you inherit something within 180 days (about six months) after filing your bankruptcy case, that inheritance usually becomes part of your bankruptcy estate. 

In other words, the trustee can take it to pay creditors.

Think of it this way – bankruptcy courts don’t want people filing and then conveniently keeping a big inheritance right after. So they made this rule to prevent that. 

If the inheritance comes after that 180-day mark, things usually look better for you in Chapter 7. 

But Chapter 13 plays by a different set of rules, which we’ll get into soon.

Also Read: How Much Does A Lawyer Charge For Chapter 7 In California?

What Happens To Inherited Property In Chapter 7?

Chapter 7 is often called liquidation bankruptcy. The trustee looks at your assets and sells off anything that isn’t protected by exemptions. The money then goes toward paying off your debts.

So what happens if you inherit something here? 

If it comes within that 180-day window, the inheritance is considered part of the bankruptcy estate. That means the trustee has the right to take it.

Now, exemptions can help. California has specific rules that let you keep certain types of property, or at least a portion of it. 

For example, some equity in a home, a car up to a certain value, or personal items like clothing can be protected. If your inheritance fits within the limits of the exemptions you chose, you may be able to hang on to some or all of it.

But if your inheritance lands in your lap after those 180 days, the trustee usually can’t touch it. At that point, it’s all yours.

What Happens To Inherited Property In Chapter 13?

Chapter 13 is different because it’s a repayment plan that usually lasts three to five years. 

You don’t lose your stuff the way you might in Chapter 7. Instead, you agree to make regular payments to your creditors over time.

Here’s the catch: inheritance can still affect you here, even if it comes after 180 days. 

Why? Because the court looks at your financial ability to pay throughout the entire plan. If you suddenly get a big inheritance two years into it, the trustee may argue that you can afford to pay more. 

Also Read: Money Received After Filing Chapter 7

That could mean your monthly payments increase, or your repayment plan gets adjusted.

So unlike Chapter 7, the timing doesn’t protect you as much in Chapter 13. Any inheritance you get while your repayment plan is still active can potentially be factored in.

Types Of Inherited Assets And How They’re Treated

Not all inheritances look the same. Some are straightforward cash, while others might be a house, land or even a car or jewelry. 

The way each is handled in bankruptcy can be slightly different:

Cash Inheritances

Cash is the hardest to protect in a bankruptcy.. 

If you’re in Chapter 7 and that money shows up within 180 days, it usually gets scooped up by the trustee. Unless you’ve got exemptions to cover part of it, the funds are likely headed toward your creditors. 

In Chapter 13, even if the inheritance comes years after you’ve filed, the court may still expect you to put that cash toward your repayment plan. 

Cash is the easiest for the system to claim and the toughest for you to hang on to.

Real Estate

In Chapter 7, the trustee might try to sell the property, especially if your share of it isn’t covered by California’s homestead exemption. If you already own a house, that exemption might shield some of the value, but it often won’t protect a brand-new inheritance fully. 

In Chapter 13, you probably won’t lose the property outright, but the value of the inheritance could cause your repayment plan to go up. 

That means more of your income will be directed toward creditors. 

Real estate is one of the trickiest assets to inherit during bankruptcy, because it can create both value and debt at the same time.

Also Read: How to Remove a Judgment Lien from Property Chapter 7

Personal Property

Not all inheritances are giant homes or land. Sometimes it’s smaller, but still valuable, items like cars, jewelry, artwork, or family heirlooms. 

In Chapter 7, the trustee can sell these if they’re worth more than the exemptions allow, which means you could lose things you really care about.

The wildcard exemption in California can help cover some of this, but it has limits. 

In Chapter 13, you probably won’t lose the items themselves, but their value might increase your payment obligations. Even if it’s something sentimental, like your grandmother’s ring, it still gets counted when the court looks at your financial picture.

California’s Exemption Systems

California is a little different from other states because it gives you two exemption systems to choose from when you file bankruptcy. 

You can only pick one, so the choice really matters. 

The system you select can decide if you get to keep part of an inheritance or if it ends up with your creditors. 

Here’s how the two options break down.

• System 1 focuses on protecting home equity and is usually best for people who own a house with significant value.
• System 2 is more flexible and includes a wildcard exemption that can cover cash, bank accounts, or other personal property.

Picking the right system depends on your situation, and the wrong choice could mean losing more of your inheritance than you need to.

Bottom Line

Inheriting property while dealing with bankruptcy in California is complicated.

In Chapter 7, inherited property within 180 days can be taken by creditors unless exemptions apply. In Chapter 13, inherited property can change your repayment plan no matter when they come in.

The kind of asset you inherit (cash, real estate or personal property) also impacts how things play out.

The smartest move is to plan ahead.

If an inheritance is on the horizon, take the time to talk to a professional before you file. A little strategy upfront can make all the difference in what you keep and what you lose.