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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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