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What happens to inheritance if you are bankrupt
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What happens to inheritance if you are bankrupt

What happens to inheritance if you are bankrupt

Inheritance received while you are bankrupt has to be paid to the official receiver. This is an important factor to consider when deciding whether to go bankrupt, particularly if you have an elderly relative.

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Inheritance during bankruptcy must be paid to the official receiver

If you are bankrupt, any inheritance you receive is considered to be a windfall. It forms part of your bankruptcy estate and has to be paid to the official receiver (OR). They will use the money to repay some or all of the debt you owed.

There are two main scenarios where this will happen.

The first is if someone dies and leaves you money during the year you are bankrupt. Under the rules of after acquired property, any funds you receive must be transferred to the OR once you get them. This is the case even if probate takes a long time and the money is not made available until after you are discharged.

Alternatively, you may be left money in a will but then go bankrupt before it is paid to you. Once the probate is sorted and the money becomes available, again it must be paid to the OR.

You can keep any inheritance you receive if the person who leaves you the money dies after you are discharged.

Will you ever get to keep any of the money?

You are unlikely to be able to keep any inheritance you receive while you are bankrupt.

Once the money is transferred to the OR, they can first charge their fees and costs. As a rule of thumb these will be a minimum of £6000. They can then deduct the total of the debt owed and interest on the debt of 8% pa from the date of the bankruptcy order.

Any funds remaining after all of these amounts are paid are then returned to you. But it is likely there will be nothing left to return unless the amount you inherited is significantly larger than your original debt.

Where your case has been passed to a Trustee in Bankruptcy (a commercial insolvency practitioner), the fees and costs they deduct are likely to be significantly higher than £6000.

Options if you are likely to get inheritance in the near future

If you believe you could be left an inheritance by someone during the next 12 months (the period you will normally be bankrupt for), this debt solution might have to be avoided.

Simply hoping the the official receiver will not find out is not an option. The solicitor dealing with the Will should check for bankruptcy before paying out. They will the inform the OR of the situation.

The best alternative in these circumstances is to delay going bankrupt. Consider using a debt management plan to give yourself a breathing space from your creditors. Once you have received your inheritance money, you may simply be able to settle your debt. If not bankruptcy might then be an appropriate option.

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Comments 6

  1. Simon C
    24.06.2021

    Hi James,

    My mother has just passed away on the 1th June. She left no will. She owned her own house, estimate of £225k. I have two older brothers. Sadly, I seem to be the only one able enough to sort out Probate etc and apply for administration. It is quite straight forwards as she has 2 loans and a car finance in the way of debt.

    Mum had said she was going to do a will solely in mine and wifes name ( as we were the only ones there and caring for her) as her way of thanking us for 4 years of care. Do I take it that I am going to have to pay this to the OR?

    If that is the case, which really hurts, what then happens to the bankruptcy? Does this stay on my credit file for all the years as normal? I am so confused, and trying to see if there is ANY way round this.

    I do hope you can offer some advice.

    1. 24.06.2021

      Hi Simon C

      Unfortunately getting inheritance while you are bankrupt is not ideal. Given there was no will, I can’t advise on where you stand legally in terms of who inherits what from your mother. You will need to take legal advice from a family solicitor on that.

      However, I can say that if you inherit anything at all in your name before you are discharged, you (or any solicitor working on your behalf) are legally obliged to inform the OR. If you do not, it would be a serious matter and you could be prosecuted.

      The OR can take the following from any money you inherit:
      100% of the total debt owed in your bankruptcy
      100% of their costs and charges (likely to be £10k)
      Interest at 8% pa on the total debt from the start date of your bankruptcy

      If there is anything left from your inheritance after these deductions, you will be able to keep it. Note: This situation is the same if you do not actually receive the inheritance money until after you are discharged.

      If all the monies as described above have been paid before you are due to be discharged, the OR would then give you an early discharge as there would no longer be any point in you remaining on the insolvency register. However I believe the record that you were bankrupt will remain on your credit file for the full period of 6 years from the start date. As such your credit rating is unlikely to be improved by this situation.

  2. Maxine W
    08.04.2021

    Hi was declared bankrupt nine years ago, can I receive a small pension windfall?

    1. 08.04.2021

      Hi Maxine

      Given you are now discharged, you can take a lump sum from your pension if you wish. The money will be yours to keep. Drawing money from a pension is only considered a windfall and payable to the official receiver if the money is withdrawn before you are discharged.

  3. Paul
    26.03.2021

    I am currently going through a separation. Family home in ex spouse’s name. If I go bankrupt now, would any money I receive from the separation go to the OR or would I keep it

    1. 26.03.2021

      Hi Paul

      You need to be very careful about going bankrupt in this situation. Even though the property is in your ex’s name, if you are married (or have recently separated) or simply lived together for a while, the OR is likely to claim that you have a financial interest in the property. As such they would go after this as an asset of your bankruptcy, and you would not see any of the money.

      Given this, before making any decision about going bankrupt I would strongly advise that you give me a call to properly discuss the implications. The advice is free and without obligation.

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ABOUT THE AUTHOR
James Falla
I have been advising people on how to solve their debt problems for over 20 years. During this time I have helped many people go bankrupt. I am an FCA Approved Person and the Managing Director of Wilmott Turner Financial Services (owner and operator of Bankruptcy Expert
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