Gift, Profit and Inheritance in bankruptcy

What happens to gifts, winnings and an inheritance in bankruptcy? 

If you are in bankruptcy, the question sometimes arises as to whether a more or less unexpected windfall can be kept by the debtor or should be surrendered. Do birthday, wedding or other gifts have to be assigned during the bankruptcy or under what circumstances they may be kept by the debtor. Bankruptcy attorney can better answer these confusing questions. What about winnings from a lottery or an inheritance? The following article answers these questions.

One thing can be said in advance: whether or not you are allowed to keep a windfall depends largely on three factors: 

  • Type and amount of the cash blessing.
  • Time of asset acquisition.
  • Time of filing for bankruptcy before October 1st or after September 30th.

The individual phases of bankruptcy must be observed: the phase before the opening of the bankruptcy proceedings, the bankruptcy proceedings in the narrower sense, the period of conduct and the decision on the discharge of residual debt. You can find more detailed explanations of the individual phases of bankruptcy in our basic article on the process of bankruptcy.

Do I have to give gifts and winnings from gambling? 

Whether you have to give gifts or winnings from games of chance to the bankruptcy administrator or trustee depends fundamentally on when the bankruptcy petition was filed. 

1. Bankruptcy proceedings based on an application to open before October 1st 

If you are in bankruptcy proceedings that go back to an application submitted before October 1st, 2020, the following applies to you:

  1. a) During the bankruptcy proceedings

If you receive a gift or make a profit from a game of chance, the question arises whether you have to give it to the liquidator or trustee. The point in time at which the asset growth occurs is decisive for this. If you are still at the beginning of bankruptcy (i.e. in bankruptcy proceedings in the narrower sense), Section 35 (1) applies. Thereafter, the acquired during the bankruptcy proceedings in the strict sense faculties – so that gifts and profits – hence part of the bankruptcy estate and the debtor surrendered. 

  1. b) After the bankruptcy proceedings / during the conduct of business period

If you are, however, in the period of good conduct, then you can look forward to relaxation. You can even save up your assets again. You can therefore keep any gifts or winnings received (see Section 295 (1) No. 2 old version). 

Background to Section 295 (1) No. 3 old version:

Even if Section 295 (1) No. 3 requires the debtor to provide information about the existing assets at the request of the bankruptcy court or the trustee, it is not in order to demand a possibly acquired gift or gain. Rather, the standard is intended to ensure that attachable income not passed on by the employer to the trustee and income saved by the debtor can be subsequently demanded (cf. § 816 Paragraph 2 BGB). 

2. Bankruptcy proceedings based on an application for opening made on October 1st,  

After a reform of the insolvency law, the new obligation to surrender applies to debtors who are in bankruptcy proceedings that were opened on the basis of an application made after September 30. So there is one major change:

  1. a) The above applies during the bankruptcy proceedings.
  2. b) After the bankruptcy proceedings / during the conduct of business period

Half of the gifts made in connection with an anticipated succession are to be returned to the trustee. Profits that are made in connection with a game of chance are to be returned in full to the trustee.

Can I give a present? 

If you are in bankruptcy wondering whether you can give a particular gift, there are a few essential things to keep in mind: 

Gifts made before the opening of bankruptcy proceedings can be challenged by the bankruptcy administrator (§§ 143, 129, 134) in order to bring you back into the bankruptcy estate. However, this does not apply to every gift given. If the gift is to be regarded as a customary occasional gift of low value, the recipient may keep the gift. So it has to be a gift given to a certain occasion, like

– Christmas       

– Birthday       

– Wedding       

– Communion, confirmation       

– Something like that          

or a donation made irregularly, such as a donation to a political party, charity, or church. 

It must also be a gift of little value. The law sets the limits for a single gift at a maximum of $200 or at $500 per calendar year fixed. Donations exceeding the value of the gift are contestable.

Can I keep an inheritance? 

When it comes to the question of whether an inheritance can be kept during bankruptcy, the point in time for answering the question is decisive. 

1. During the bankruptcy proceedings in the strict sense

According to Section 35 (1), inheritances arising during the bankruptcy proceedings are assets that are also fully added to the bankruptcy estate. This means that in the event that you take over the inheritance, the entire estate would become part of the bankruptcy estate. This can be advantageous in one case: If the heir should pay off the entire bankruptcy claims and settle the procedural costs, you could end the insolvency proceedings early without having to go through a period of good conduct until the remaining debt is discharged after the bankruptcy proceedings. 

If, on the other hand, the inheritance is not enough to pay off all debts and the legal costs, then you can turn down the inheritance without any legal disadvantages. You can then exchange ideas within the family circle about how the assets can be distributed after the bankruptcy proceedings. 

2. During the conduct period

If you take over the inheritance during the conduct of business period, half of it must be assigned to trustees (Section 295, Paragraph 1, No. 2 Alt. 1). However, in this phase as well – as in every phase of bankruptcy – you are at liberty to reject the inheritance in order to leave the assets with the family. 

3. Special case: what if the future inheritance is given to me during my lifetime?

The so-called anticipated inheritance is a special case. This means cases in which a testator turns his property over to the future heir during his lifetime. The legislature has also regulated such a case in Section 295 (1) No. 2 Alt. 2 (old version). According to this, half of a donation that anticipates a future inheritance should also be paid to the trustee. In this way, the legislature wants to prevent the regulation on the half-way surrender of the inheritance from being undermined during bankruptcy.

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