Halloween is the time for spooky stories. I heard of a spooky situation develop in a bankruptcy case that is vital for everyone considering filing for bankruptcy. It is a bankruptcy-estate planning nightmare.

A friend of mine who is a bankruptcy attorney in St. George told me of a nightmare situation that almost ruined a family’s financial future.

A couple (we will call them Mary and Michael) went to my friend for a standard, typical Chapter 7 bankruptcy The couple had started a successful custom cabinet company in Southern Utah and was very prosperous. Prosperous, until the housing market crashed and home-building crept to an almost immediate halt. The couple had hundreds of thousands of business debt and creditors pounding on their doors.

After filing bankruptcy, everything seemed to be going smooth. Financial problems are always difficult, but it seemed like our couple was finally going to be able to receive the fresh start they were looking for. A personal tragedy, however, was lurking in the near future.

A few weeks after receiving a the order of discharge in their bankruptcy, Mary’s mother was killed in a tragic car accident. It was devastating to the couple.

Despite the personal grieving and overwhelming sense of loss- the couple was doing okay. They both had new jobs and were trying to re-start their lives. Mary’s mother left a sizeable inheritance (over $750,000) and Mary was the only child and would receive all of her mother’s estate. Then the hang-up arrived- the mother of the wife had died intestate. This means that she left no will or any form of estate planning documents directing how she would like her estate administered after she died. The probate court would decide her future.

When somebody in Utah dies intestate, or without a will, the administration of her estate is governed by Title 75 of the Utah Code- formally known as the Utah Uniform Probate Code. Section 75-2-103 of the Probate Code lays out the succession of assets when somebody dies intestate. In English- when someone dies without a will, then their estate goes to their spouse. If there is no spouse, then it goes to his or her heirs (i.e.- children, in equal shares). Because Mary was an only child, she would receive 100% of her mother’s estate. Or so she thought…

Section 541(a)(5) of the U.S. Bankruptcy Code states that any inheritance (whether received by will or through intestacy) received within 180 days after filing for bankruptcy becomes property of the bankruptcy estate. This means that, unless you can claim a valid state exemption, if you receive an inheritance within 6 months after filing for bankruptcy- then you may lose all of that inheritance to creditors. There is no exemption in Utah for an inheritance, though there is one for life insurance benefits.

The trustee in Mary’s bankruptcy case seized all of every cent of her inheritance and used it to pay creditors.

Fair, or not, we can be sure about one thing- this is not how Mary’s mother would have wanted her estate to be used when she died. Proper estate planning could have insured that Mary’s mother’s assets were protected. While Mary’s situation was unique and probably not all that common- not preparing for untimely accidents is very common.

Preparing a will or other means of effective estate planning is something that everyone should do- particularly if you have children. Designating someone to take care of your children in the event of an untimely accident is something that would give everyone piece of mind. Laying out a medical directive in the event that you are incapacitated should also be a crucial concern for everyone. Even if you don’t have much of an estate- effective estate planning can ensure that your wishes are upheld even through your death. If you, or someone you know, are in need of effective estate planning, call today for a free consultation.