Windfall during Bankruptcy
If you are bankrupt you need to understand what happens if you receive a windfall. Any lump sum payment you get before your bankruptcy is over is classed as a windfall. This includes things like an inheritance payment, a lottery win, a compensation pay out or an unexpected bonus.
Generally speaking it is unusual to receive a windfall but if you do it is an extremely welcome addition to your finances. However if you are Bankrupt this may not be the case. You may not be able to keep the cash which has been given to you.
What happens to a Windfall if you are Bankrupt?
All windfalls you receive while you are still Bankrupt are treated as an asset of the bankruptcy. This means that they have to be paid to the Official Receiver (OR) who is dealing with your case. The money will then be used to pay the OR’s fees and the debts you owe.
If you receive a windfall you are legally obliged to inform the OR of this. If you do not tell them and they subsequently find out you could be at risk of having your bankruptcy extended for non co-operation. You may even risk being accused of a criminal offence.
BE Tip: Before a windfall is paid to you the organisation or solicitor responsible for making the payment will normally check to see if you are Bankrupt. If so they will be obliged to contact your OR and make the payment directly to them.
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Can you keep any part of a Windfall received if you are Bankrupt?
If you receive a windfall before you are discharged from Bankruptcy generally speaking all the money has to be paid to the Official Receiver. You will not be allowed to keep any of it unless the amount received is very small. The OR will not be interested in a £10 lottery win.
If you have a financial emergency you can ask your OR if they will agree to letting you keep some of your windfall. There is no guarantee that they will agree to this and they are not obliged to do so. However you may have exceptional circumstances where they will. It does not hurt to ask.
The one exception where you can keep a windfall is in the case of personal injury compensation paid for pain and suffering. This element of a personal injury claim would be yours to keep. However any element paid for loss of earnings would go to the OR.
Could a Windfall result in your Bankruptcy finishing early?
The fact that you receive a windfall will not normally mean your Bankruptcy finishes early. The only way this could happen is if the amount received is sufficient to pay the total of your outstanding debt plus the Official receiver’s costs and statutory interest.
As such unless the amount you have received is very large it is unlikely that your Bankruptcy will be finished early as the result of receiving windfall.
If the money you get is not sufficient to pay all your debts and costs it will simply be paid to your OR. Your bankruptcy will then continue as normal until you are formally discharged.
What if you get a Windfall after your Bankruptcy has ended?
After you are discharged from bankruptcy the windfall rule no longer applies. A windfall you receive after this date is yours to keep. As such if you win the lottery or you are left money in a Will after you have been discharged you can keep this money.
There is however an exception to this rule. This are when the windfall received can be classed as an unrealised asset of your Bankruptcy. An unrealised asset is any windfall received as the result of an event that happened either before or while you were bankrupt. This money still has to be paid into your bankruptcy.
A good example of this is an inheritance payment which becomes due to you while you are bankrupt. If your benefactor died before or during your bankruptcy any subsequent payment due to you after probate must be paid into your bankruptcy. This is the case even if it is not made until after you are discharged. Compensation for mis sold PPI taken before you went bankrupt also falls within the the unrealised asset rules.
What happens to a Windfall if you have an IPA?
The bankruptcy windfall rules are not extended by an Income Payment Agreement (IPA). As such if you are still making payments towards your debts after you have been discharged from Bankruptcy a windfall you receive is yours to keep.
The fact that you still have an IPA does not mean that you still have to pay a windfall you receive to the Official receiver. The two things are not connected.
This also applies if you get an unexpected bonus from work which is classed as a windfall. As long as it is not an expected or regular payment you should be able to keep the bonus if you have been discharged. You would only need to increase your monthly payments if your income increases or your living expenses fall while you are in an IPA.
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