Inheritance During Bankruptcy Case Shakes Up Ch. 13 Plan

A weekly news service that publishes case summaries of the most recent important bankruptcy-law decisions, tracks major commercial bankruptcies, and reports on developments in bankruptcy reform in...

By Diane Davis

Sept. 13 — A debtor who received an inheritance mid-way through his Chapter 13 plan doesn't have to use the extra money to pay the debts his wife owes separately, a bankruptcy court in Missouri held Sept. 9 ( In re Portell, 2016 BL 295171, Bankr. W.D. Mo., No. 12-44058-13, 9/9/16 ).

Judge Arthur B. Federman of the U.S. Bankruptcy Court for the Western District of Missouri overruled the Chapter 13 trustee's objection and granted the debtors' motion to spend their inheritance.

If the debtor had received the inheritance the day before filing bankruptcy, it would without question be property of his bankruptcy estate, the court said. While most courts have concluded that under Bankruptcy Code Section 1306(a)(1), a post-petition inheritance is property of the bankruptcy estate in a Chapter 13 case, the court said, a few minority of courts disagree and there is no controlling authority in this court.

The court concluded that under Missouri law, the debtor husband's inheritance is his separate property and includable in only his bankruptcy estate for the payment of only the debts for which he is liable.

Debtors Keith and Michele Portell filed for Chapter 13 protection, which allows individuals receiving regular income to obtain debt relief while retaining their property. To do so, however, the debtor must propose a plan that uses future income to repay all or a portion of his debts over a three to five year period.

The debtors were in the 34th month of a 63 month plan when Keith received an unexpected inheritance of more than $221,500 from one of his relatives. The debtors proposed using the inheritance funds to pay all joint and sole debts owed by Keith, including their jointly owned homestead, but they didn't want to pay the debts for which Michele was solely obligated. According to the debtors, this will leave approximately $12,000 of Michele's separate debts unpaid.

The Chapter 13 trustee objected, arguing that the inheritance is property of the bankruptcy estate under Section 1306(a)(1), and a post-petition change in circumstances requires a modification of the plan and a good faith requirement.

The court looked at the Missouri law in question, § 451.250.1 of the Missouri Statutes, and determined that an inheritance received by Keith is his own separate property, which outside of bankruptcy, can't be taken to pay Michele's separate debts, the court said.

The court found the debtors' modifications to their plan in good faith, and allowed them to propose a plan that committed enough of the inheritance to pay Keith's creditors in full, but didn't pay Michele's separate creditors more than the 40.334 percent provided in the previously confirmed plan.

Rachel Lynn Foley, Independence, Mo., represented debtors Keith Allen Portell, Michele Lynn Portell, fka Michele Lynn Crowder; Chapter 13 Trustee Richard Fink, Kansas City, Mo.

To contact the reporter on this story: Diane Davis in Washington at ddavis@bna.com

To contact the editor responsible for this story: Jay Horowitz at jhorowitz@bna.com

Copyright © 2016 The Bureau of National Affairs, Inc. All Rights Reserved.