Legal Question in Bankruptcy in California

Re: Bankruptcy and inheritance

Thank you for your well drafted question. I hope this helps.

If a bankruptcy were necessary (which it would not be if the funds are used to pay off your debt), a chapter 13 would probably be worth consideration over a chapter 7, if your goal were to preserve your inheritance. If you can reconcile the possible loss of a portion of your inheritance, than a chapter 7 would be something to consider. Let�s look at each chapter with the facts you have given. Under a chapter 7, because your home is under-secured (i.e. you owe more on your house than it is worth) we can use the CCP 703 exemption scheme. Under this, because there is no equity the court is not interested in taking your home (of course you must remain current on both mortgages); the $9,000.00 vehicle has at least $5,400 equity (note the trustee is not required to use low blue book- replacement value is used). Under the auto exemption you can protect $2,400.00; the remaining $3,000.00 equity can be protected using the �wild-card� exemption; the two $2,000.00 vehicles can also be protected with the �wild card�. Thus, leaving you, at best, $8,800.00 to protect your inheritance (assuming the wild card is not necessary to protect other assets, and assuming the trustee does not object to the low blue book value of the $9,000 vehicle). The computer loan is secured, hence, if you want to keep it, you will need to plan on negotiating with the creditor (i.e. Continue payments, or settle on the fair market value-lump sum payment. Under a chapter 13, the inheritance is not per se in jeopardy, however, you would have to pay your unsecured creditors approximately 60% to 100%, over a maximum of 5 years. The computer loan would be paid in full as well under the plan.

Of special note, a chapter 13 could be a vehicle to strip the lien of the second mortgage (i.e. treat it only as an unsecured creditor).

Notwithstanding the above, because of the future credit draw back of bankruptcy, your idea of using the inheritance to pay off your credit cards, car loan, and computer loan may be very sound. Note, if you go this route, avoid usage of the cards after you pay them down.

I am a Certified Bankruptcy Specialist, State bar of California. Our consultations are free, so do not hesitate to call if you require further clarification.

Best of Luck