Is Your Inheritance Threatened If Your Spouse Files for Bankruptcy?

Asset protection can be a complicated financial and legal process whether you are married, separated or seeking divorce. It is important to be aware of the possible legal implications in case of a spouse filing for bankruptcy, while the other is due to receive an inheritance.

If you are about to add to your assets, even if it’s by inheritance, your spouse may not be able to file for bankruptcy. To some extent, this depends on the laws governing the state you live in. Prior to getting married, if you have signed a pre-nuptial agreement defining individual and marital property, your inheritance is likely to be considered as separate from that of your spouse. If you haven’t, your inheritance might still be considered separate property, but may give rise to some complicated situations and questions during your spouse’s bankruptcy hearing.

Any asset that you gain or acquire during a marriage is considered as marital or community property. Individual property can be assets owned before getting married, and in some cases can include gifts and inheritance. These cannot be divided at the time of divorce but can be considered as marital property in the case of a spouse filing for bankruptcy. It is best to get legal counsel in such a situation as the issue of treatment of inheritance may lie in a grey area.

There are two kinds of laws that can define the fate of your separate asset. Nine of the American states are community property law states where an inheritance will be considered as being jointly owned by both husband and wife. There are a few exceptions to the rule where the asset can be declared as separate. The other states fall under common law where you will be able to protect your inheritance as being separate from your spouse’s property.

Spending of inheritance after or before filing bankruptcy can also be an issue of significance. A court can rule inappropriate expenditure if you have spent on unreasonable items like a new dishwasher. Make sure you have all the necessary documentation in place. If you are using your inheritance to pay off necessary expenses like a mortgage loan payment, keep a detailed report of the same. Also, avoid spending towards community property like vehicles, furniture for house etc.

Hiring a competent lawyer who is familiar with estate planning or bankruptcy is a good move towards protecting your assets. Check all the available alternatives before your spouse files for bankruptcy, to make sure you can save your inheritance from being included to pay off bad debts.

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