Chap 13 and Inheritance

[DJC]

I posted a rather long and multi-topic discussion a few days ago. I thought I would repost the issue at hand since the details of my situation are clearing up. Here are the facts;
Our 341 meeting is scheduled for March 13th
My wife, due to both parents passing, will stand to inherit an amount of money that far exceeds the amount owed to our creditors.
The trust that she will inherit specifically states the money and property cannot be used to pay creditors or used to pay off a bankruptcy.

Does it make any sense to withdraw/dismiss our filing and deal with creditors at a reduced amount? (I have funds through a 401k)?

Can the trustee trump the trust my wife will inherit regardless of the wording?

If there is enough to pay off the creditors 100%, are then discharged early?

Our attorney has told us to simply state at the 341 hearing that, yes there was a death but we do not know the financial details yet?

My wife's inherited trust gives 15% to our daughter (16 years old) for educational purposes only or until she reaches 25 years of age. What about this, our fear is that it is not protected.

My wife and I are in our sixties, and I would really like for us to retire. Thus neither of us really wants 5 years of a court ordered budget. Our financial downfall was my parents being in a dementia facility for several years just after we had bought and moved into a more expensive home. We would just like to be free and sell our house in two more years.

My sense is that our attorney can only guess at outcomes. My hope is that someone in this forum may have gone through something similar to our circumstances.

Thank you very much.

[LadyInTheRed]

Does it make any sense to withdraw/dismiss our filing and deal with creditors at a reduced amount? (I have funds through a 401k)?.

If your wife is currently entitled to receive more than the total debt, then she is not insolvent. So, any amount forgiven by creditors will be taxable income. You need to weigh the income tax consequences of debt forgiveness and the income tax you will pay on the 401k distributions along with the risk that the creditors will not settle against the ability to pay all of the debt, interest free over 5 years in a Chap 13, without incurring income taxes.

Can the trustee trump the trust my wife will inherit regardless of the wording?

It depends on what your wife's current rights are to trust assets and what your state laws are. The trust may say that the trustee of the trust can't pay your wife's creditors, but if your wife is entitled to distributions in the next five years, then those distributions are probably accessible by the BK trustee after your wife receives them. If it is up to the trustee of the trust whether to make distributions, then it may be more difficult for the BK trustee to get at the funds. Also, it may be that the BK trustee can sell her future rights to receive assets from the trust. This is all very speculative without knowing the dispositive terms of the trust and your state laws on the issue. Now that I've typed all of this, I realize that in a Chap 13, the trustee won't go after the trust like a Chap 7 trustee would. But, he will want to determine the current value of your wife's interest in the trust and to make sure your unsecured creditors receive at least what they would receive in a Chap 7 liquidation.

If there is enough to pay off the creditors 100%, are then discharged early?

Your plan would end as soon as you pay 100% of your debt. The debt wouldn't technically be discharged because you would have paid it off. But, if any creditors do not file claims, then those debts would be discharged.

Our attorney has told us to simply state at the 341 hearing that, yes there was a death but we do not know the financial details yet?

Take your attorney's advice.

My wife's inherited trust gives 15% to our daughter (16 years old) for educational purposes only or until she reaches 25 years of age. What about this, our fear is that it is not protected.

Your wife has no right to access that 15%, right? So, that 15% of the trust is not your wife's asset.

My sense is that our attorney can only guess at outcomes. My hope is that someone in this forum may have gone through something similar to our circumstances.

It is true your attorney can only guess at the outcomes. The trustee will want to investigate the trust and then decide what kind of position to take regarding its current value. Even if other forum members have been in similar situations, you could still only guess whether the outcome of your situation would be similar to theirs.

I think you should tell the trustee what your attorney said to tell him, wait to see what the trustee does, then decide whether to proceed with the Chap 13 or let it be dismissed. The decision should be a financial one. Keep in mind that the "court ordered budget" is not something you need to stick to. Once your plan is confirmed, you can spend your money however you want as long as you make your plan payments. You will also be able to sell your house, even if you need to get the approval of the trustee. If your plan pays 100% of unsecured claims, then your budget will be even more flexible than if it paid a fraction. I'm near the end of a 5 year Chap 13 and the biggest difference it has made in my life is that I send one $500 check to the trustee instead of making payments totaling around $900 to several creditors with no end in sight. If it weren't for my participation in this form, BK would be so far from my mind most of the time that I might forget to send my plan payment. So, make your decision based on the numbers, not out of fear of Chap 13.

[DJC]

Thank you so very much for your input. It is nice to know there are folks who are knowledgeable through experience.

[BKAttyMI]

Another thought...If you allow the claims bar date to pass and are able to then request a "payoff quote" from the Trustee's office and your wife is able to access that amount, she can pay off the case with a discount on any creditors that haven't bothered to file claims. Those unfiled claims will be discharged.

[justbroke]

That would be the best BkAttyMI.