The 4th Circuit Court of Appeals (of which North Carolina is a part) ruled October 28, 2013 that a Chapter 13 debtor who acquires a bequest during the pendency of the bankruptcy case may have to turn over part, or all, of the inheritance to the Chapter 13 Trustee for application to the unsecured debt of the beneficiary. Click here to view the opinion.
Judge Stephani W. Humrickhouse followed up the 4th Circuit opinion with a holding in a case from the Raleigh Division of the Eastern District of North Carolina that stated receipt of the bequest is irrelevant and that entitlement is the critical issue. One of the possible ways to avoid the loss of a bequest would be the request that the testator (individual executing will) not bequeath the asset directly to the chapter 13 debtor, but rather bequeath the asset to a trust for the benefit of the Chapter 13 case that includes a valid spendthrift provision. Unfortunately, this requires the debtor to raise two sensitive topics with the testator. And of course it is not always clear what bequests are likely to come about during the pendency of a Chapter 13 plan. Nonetheless, since the timing of death is not predictable, many Chapter 13 plans are 5 years in length, and the testator likely is seeking to confer a maximum benefit on the beneficiary as opposed to the creditors of the beneficiary, the risk averse Chapter 13 debtor should at least consider requesting a rewrite of the will as suggested above.