Would a bankrupt be able to keep an inheritance?

November 16, 2015

Being the beneficiary of a deceased estate in bankruptcy can be complex, and whether or not you keep the inheritance depends first and foremost on the deceased’s date of death. As far as an inheritance is concerned, your entitlement to the money or property starts on the date the person died.

The Trustee appointed to administer your bankruptcy transfers all of your assets to their control for the repayment of creditors. Being the beneficiary of a deceased estate in bankruptcy means that the money or property inherited may also be claimed by your Trustee.

Therefore, if the date of death was prior to your bankruptcy order the inheritance will be transferred to the control of the Trustee along with all of your other assets. Any money or property inherited after the order has been made but before you are discharged, is called ‘after-acquired property.’

A duty to inform the Trustee of after-acquired property

When a deceased estate is administered, a bankruptcy check on all beneficiaries should be carried out by the executors. If this does not happen for any reason, the Trustee may have the right to sue the executors for the amount lost to your creditors.

After a bankruptcy order has been made, you have a duty to declare any inheritance or windfall to the Trustee within 28 days. The Trustee then has a time limit of 42 days from the date they became aware of the inheritance, in which to make a claim on it in writing.

Retaining some of the inheritance

On rare occasions, a bankrupt can make a request to retain some or all of their inheritance, but obtaining specialist legal guidance prior to attempting this is advisable, and it’s worth reiterating that successful cases are extremely rare.

If you spend any of the inherited money and this is discovered by the Trustee, it is likely that the period of your bankruptcy will be extended because of your non-adherence to the rules.

If the date of death was after your discharge from bankruptcy, the Trustee has no claim on your inheritance as the bankruptcy rules no longer apply, and even with an Income Payment Agreement (IPA) still in force, this will not affect your entitlement to the inheritance as a lump sum.

Should you decide to invest the money, the income earned from it needs to be declared as the Trustee may use it to increase the level of IPA repayments from that point on.

Could an inheritance mean an early discharge from bankruptcy?

Depending on the size of your inheritance and the amount of debt still owed to creditors, it may be possible for you to apply for an early discharge from bankruptcy.

All debts included in the bankruptcy order would have to be repaid, in addition to the Trustee’s costs for administering the process which could be significant, but any remaining balance would belong to you.

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John Baird

Insolvency Adviser

Tel: 0800 063 9250

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