Bankruptcy and Inheritance: The Facts

No one likes to consider the possibility of a friend or loved one dying. But if you’re in financial difficulties and in line to receive an inheritance, the resulting money or assets could be a big help. But what happens if you’ve already taken steps to manage your debts and are in the process of declaring bankruptcy, or are already bankrupt? This article from personal insolvency specialists, Bankruptcy Clinic, sets out the key facts.

bankruptcy and inheritance


Everything hinges on the date of death

What happens to your inheritance will depend on the date your friend or relative passed away, in relation to the date your Bankruptcy Order was made or discharged. This is because, from the moment of their death (and not, as is often thought, from the time that the Will is read or Probate granted), you become entitled to receive your inheritance. Therefore, the money or property immediately forms part of your estate.


When is the date of death?

  • Before your Bankruptcy Order is made

In this situation, your inheritance will be passed to the Official Receiver (OR) along with your other assets once you’ve been made bankrupt. If you already have the inheritance, it will be used to repay your creditors, once any assets have been realised.


  • During your bankruptcy period

As with any other windfall or change in your financial circumstances, you must tell the OR about your inheritance as soon as you become aware of it. They’ll claim it and use it to repay your creditor once the amount and type of your legacy have been established.


Of course, it can take a while for deceased estates to be sorted out and you may not receive your inheritance until after your bankruptcy has been discharged. Unfortunately, as everything hinges on the date of death, you’ll still need to hand it over to the OR – even if several years have passed since your bankruptcy ended.


  • After your discharge

Good news: you get to keep your inheritance, even if you’re still subject to a Bankruptcy Restrictions Order or Undertaking.


However, if you’re still under an Income Payments Agreement or Order (IPA or IPO) that requires you to make regular payments to your creditors, there are implications if you invest your inheritance so it generates income. In this case, you must tell the OR about the extra income and they’ll decide whether your IPA or IPO should be increased.


If you’re not in an IPA or IPO, don’t worry as these can’t be set up after your bankruptcy has been discharged. You’re free to keep both your inheritance and any revenue it produces.


Ending your bankruptcy early

If you’re lucky enough to receive such a large inheritance that it clears all the debts listed within your bankruptcy, then you can apply for your bankruptcy to be annulled. Be warned, however, that you’ll need to pay the OR’s costs on top of your debts, which can be very high.


So make sure you take sound financial advice before deciding whether to end your bankruptcy early, or pass your inheritance to the OR. You’ll still get anything that’s left over once the OR has distributed the money or assets, so this could be a better way forward.


Avoiding handing over your inheritance

The best way to make sure the OR doesn’t get your inheritance is to ask the person bequeathing it to change their Will, if appropriate. Could they leave it to another family member instead, such as your child, brother or sister? You could also look into having the inheritance put in trust, but this is quite a complex legal process, which could cost you a lot of money.


If these steps aren’t possible, you’ll just have to resign yourself to losing your inheritance. The consequences of trying to hide it from the Official Receiver could be very serious, so don’t try it!


Find out more

For more information on bankruptcy and inheritance, or any other aspect of personal insolvency, talk to Bankruptcy Clinic. Our specialist advisers are here to answer your questions and help you make the right choices about overcoming your money problems.


Call today on 0808 168 7389, or 01625 462 770 from a mobile, or fill in our quick online form. A friendly, qualified debt adviser will get back to you as soon as possible.

Andy Gorton is the author and editor of the Bankruptcy Clinic

Andy Gorton – who has written posts on Bankruptcy Clinic Blog.

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