What happens to inheritance if you are bankrupt
- 20 Oct 2021
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.
Included in this article:
- Inheritance during bankruptcy must be paid to the official receiver
- Will you ever get to keep any of the money?
- Options if you are likely to get inheritance in the near future
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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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Thank you James for your response. In your article it says “you are still discharged after 12 months “ is the case for everyone?
Obviously I have a BRU order but I am still discharged?
Reading the restrictions it does not say anything about not be able to inherit? As I explained in my previous email my mother died in November 2021. So my understanding is I can still inherit? I just wanted clarification?
Lucy
Hi Lucy
Given you went bankrupt after 2002, the standard length of your bankruptcy would have been 12 months (1 year). You would have been automatically discharged 12 months after the date you went bankrupt.
This time scale is the same for 99% of bankrupt people. In some rare cases, the official receiver can suspend the discharge date but this would only ever happen where the bankrupt person can’t be contacted or does not co-operate.
I confirm, you are discharged after 12 months regardless of whether or not you have been given a BRU.
It might be useful for you to get a certificate confirming the date of your discharge. There is information about how you can do this in the following article. Given you went bankrupt before April 16, you need to look at section 3: Confirm you are discharged from bankruptcy
Sadly my mother died in November 2021. I am one of her beneficiaries in her will. I was made bankrupt in December 2013 and then had a BRU restriction undertaking in January 2015 for 9 years until January 2024. My understanding is I can still inherit ? She left me 1/3 of her property and 1/3 of her trust.
Hi Lucy
Once you are discharged from bankruptcy, any windfalls you then receive as a result of events that happen after the date of discharge are yours to keep. This is irrespective of whether you still have a BRU in place or not.
Given your Mother passed away after the date of your discharge, I do not see any reason why you should not be able to keep your inheritance. I do not believe that any of it would have to be paid to the Official Receiver.
Hi Iive in Northern Ireland and I have about 25k worth of debt. I live with parents they worry is that if I go down the Bankrupt route I might lose the house if they pass away. (I will inherit the house). Am I right in saying that once i’m discharged after the year of BR. The OR cant touch the house?
Hi Gareth,
You are right, if your parents pass away after you are discharged, you can then keep 100% of anything you inherit. So, as long as they do not pass away during the 12 months you are bankrupt, you will have nothing to worry about.
Even if you did inherit during your bankruptcy, the official receiver can’t take the whole house. However, they would claim the full £25k of debt + fees of around £10k. So, you would end up having to pay around £35k. Worst case you might have to sell the property to raise this sum. However, you might be able to borrow against to raise the money.
But either way, it would be far better if you don’t inherit until you are discharged.