Inheriting money when in a DMP, DRO, IVA or bankruptcy

What happens if you inherit money when you are in a debt management plan or one of the three forms of insolvency: Debt Relief Order (DRO), bankruptcy or IVA?

The answers are surprisingly different…

Inheriting in a DMP

This is the easiest case. Any money you inherit comes to you, not to your creditors or your DMP firm. And it doesn’t matter if the person dies before your DMP started or during your DMP.

It’s your choice what to do with this money, you don’t even have to tell your DMP firm.

Of course, it will often be a very good idea to use some or all of this money to settle as much of your debts as possible! And you could consider making full and final settlements on your debts. But this is up to you.

Inheriting in an IVA

When you are in an IVA (so usually five or six years) you have to notify your IVA firm if you inherit money or an asset such as part of a house.

This inheritance is called an after-acquired asset as you acquired it after your IVA began. It forms part of your IVA and it will have to be paid to your IVA firm, up to the amount needed to complete your IVA.

You may be hoping you can pay all the rest of your IVA monthly payments in a lump sum from the inheritance. But to complete your IVA early you have to repay all your debts in full plus the IVA fees plus (sometimes, this depends on the terms of your IVA) 8% interest on the debts.

If the inheritance isn’t enough to complete your IVA, your IVA continues with the normal monthly payments. If the inheritance is more than enough, the surplus is returned to you.

The solicitor or executor will often deal directly with your IVA firm. If an inheritance is given directly to you, you do have to hand this over. If you don’t tell your IVA about an inheritance or don’t comply with what the IVA firm says, this is one of the rare occasions when the IVA firm is likely to make you bankrupt.

Inheriting in bankruptcy

I have looked at this in detail here, but briefly:

You usually get discharged from bankruptcy after a year. If the death occurs before this, the inheritance has to be paid to the Official Receiver. When there is enough to pay all your creditors and the high Official Receiver’s costs, any surplus is returned to you and your bankruptcy can be cancelled – this is called being annulled.

If the death occurs after you are discharged all the money comes to you. It can’t be taken even if you are one of the small number of people (about 1 in 6) making monthly payments under an IPA after bankruptcy.

Inheriting in a DRO

After reading the above, you may guess that in a DRO the inheritance will go to the Official Receiver… It doesn’t – it all comes to you!

But, if the inheritance is over £1,000 your DRO may be cancelled and if it is over £2000 it is very likely that it will be cancelled – you will then have to sort out your debts. See What happens if I get more money in a DRO?

This is fine if you have inherited a lot, you can use the money to clear your debts.

But the difficult case is when you have only inherited a few thousand and your debts are a lot more. Here you may be able to use full and final settlement offers, but if you are still going to be left with debts you can’t repay, you may find that your DRO is ended but you are still left with debts.

You have two options. You can either:

• “disclaim” the inheritance by informing the executor of the estate in writing. If you do this, you should take a copy of the letter and send it to the DRO Unit, see inheriting money in a DRO. If you disclaim an inheritance, the money will be divided up according to what the Will says, you can’t say who your share should go to; or
• take the money, have your DRO revoked, perhaps spend some of it on urgent expenses and then go bankrupt.

Some common questions about inheriting and insolvency

Can I refuse the bequest or vary the Will?

For bankruptcy and an IVA, the answer is No: the death has resulted in you gaining an asset, you can’t choose to give it away by refusing it or varying the Will. For a DRO you can disclaim the bequest, but you can’t vary the Will.

What if I don’t get the money for a while?

It doesn’t matter when you get the money, what matters is when you became entitled to it, ie the date of the death. So there is no advantage in asking the executor to go slow with getting probate through.

How will the Official Receiver / IVA firm know?

You are obliged to tell them. And if you don’t the executor/solicitor should do a check on the insolvency register.

Is there any way round this?

Not after the death. Before then, you can suggest the person changes their will to leave the money in trust/to your partner/to your children. It can be a difficult conversation to have if the person doesn’t know you have big money problems.

My mum is pretty old, what should I do?

That’s difficult. Some very old people can live a lot longer, or all their money may end up going in care fees. If you expect to inherit within a year or two, you probably should opt for a DMP instead. If it may be longer, it’s not good to put off insolvency if that is the right option for you because of something that may happen at some time. The trickiest decision is going for an IVA where you are taking a risk for 5 or 6 years – in bankruptcy and a DRO there is only a risk for a year.