What happens if you inherit money when you are in debt management 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. It doesn’t matter if the person dies before your DMP started or during your DMP.
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 it’s your choice what happens.
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 Official Receiver’s costs (which can be high) 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 (less than 1 in 5) making monthly payments under an IPA after bankruptcy.
Inheriting in a DRO
After reading the above, you may think 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 £2,000, it is very likely that your DRO will be cancelled and 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. 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 and then go bankrupt (see My DRO is being ended because of a PPI claim which is a similar situation).
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.
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Robert Halstead says
Hi Sara,
Thanks for this great article.
One minor point – although I am not an expert, I believe it is possible to disclaim an inheritance, which may be an option for those with a DRO when the inheritance is not enough to pay off the debts but will take them above the asset limit. This is covered briefly here: http://www.thisismoney.co.uk/money/experts/article-2918385/Can-share-father-s-estate-children-instead.html
The Insolvency Service has said that when an inheritance is disclaimed it will have no effect on the DRO. They also pointed out that only inheritances can be disclaimed – it is not possible to refuse a PPI award for example.
Sara (Debt Camel) says
Thanks, Robert – I have changed the article above to reflect this!
Craig Hallsworth says
Hi I’m currently under an IVA I’m clear on April the first this year. My father has just died days ago and I have received a letter from them asking for details. What sort of actions shall I expect. Can they claim against estate and how successful is this. The estate will be going into a long probate.
Sara (Debt Camel) says
Hi Craig, I am sorry to hear about your father and that the answer to your question is not going to be good news.
It doesn’t matter how long probate takes, your IVA company will expect any inheritance you get to be paid into the IVA I am afraid. If it is larger than the amount of debts in your IVA plus the IVA fees, any surplus will be returned to you.
steve says
my father has just passed away, im 8 months into a £26k IVA , £112 a month so paying back 16p in the pound to creditors, i know i will receive 25% of whats left over in the will money wise + 25% of some land next to the house which hasnt been sold yet, i know i have to declare all that but my kids will also benefit from the will as they are named as well, can i use their money to offer full & final settlement of the IVA like all remaining payments but in one go.
Sara (Debt Camel) says
No.
(a) you need to tell your IVA firm now about your inheritance, even though you don’t yet know when or how much you will get. This then needs to be paid into your IVA to settle your debts in full plus the IVA fees. There is no way of nipping in before this step with a full & final settlement offer.
(b) money being left to your kids is anyway not your money. You would need to take legal advice about using it for anything where you are the main gainer, such as paying off your debts.
steve says
thanks for that sara but i meant hand over the 25% money and then when the land is sold hand that over as well, but after that offer a full & final settlement from a third party.
Sara (Debt Camel) says
ah ok, so the 25% of cash plus the land isn’t likely to be enough. There still remains the problem that your kids’ inheritance is their money, not yours… you would have to take legal advice as to whether you could use their money to settle your IVA and your IVA firm may need to see a copy of that advice.
Jake says
My Granfather died February of this year. My IVA finished in May of this year, I had a letter from the solicitor in September informing me that my grandfather has left me some money, just over 15,000.
Am I required ti infor my insolvency practitioner?
Thanks.
Sara (Debt Camel) says
Yes I am afraid that you do have to tell your IP.
Theresa says
Hi there, I am looking to get a dro because I have £17000 of debt. I owe 8 creditors, am on benefits and have had a debt management plan running for the past 8 years, I originally owed over £35000 so have paid off half of the original debt. Howevere last year I was left £6.5k in my Mother’s will, but all of this was spent in a few months, purchasing white goods, furnishing and carpeting my empty council house, I did not use any to pay off any debt. I was going to get a dro prior to this but was then informed because of the inheritance I couldn’t proceed. Is it possible I can now proceed as it is over a year since the inheritance and it was used shortly afterwards. Thankyou..Theresa
Sara (Debt Camel) says
Yes you can.
Worst case is that you get a Debt Relief Restriction Order (DRRO) but you probably wouldn’t care if you do… the debt adviser that sets your DRO up will explain what a DRRO is. And its implications.
Who did you speak to before about a DRO?
James says
Hi can you help
I am an administrator for my fathers estate which has to be dealt with via probate as no will was made.
The issue I have is that my sister was under a DRO at the date of my father death. No information is forthcoming from her and at time the insolvency register had her name posted under order when checked.
Some time has elapsed since then and she is no longer on the register I have made checks via land registry and they now come up as clear ?
The issue I have is that as an administrator I could be liable to creditors if I make payment to her and not to the creditors first ?
I don’t want to liable for her debits and she is not forthcoming with any information when asked ?
I understand it is the responsibility of the administrator to make checks and I have done so….but no record has come up on her.
If I make a payment out of the estate to her will she be responsible or I to her creditors?
Sara (Debt Camel) says
I am sorry I cannot give you legal advice on your liability as an executor. I suggest you consult a solicitor.
barbara theobold says
hi both my self and husband went into an iva in feb this year,my brother died in march leaving all his assest to me solely.
i have notifed payplan about this.sent the documents they asked for,my debt wasnt very big round £10,000,00 i prepared to pay mine in full.my hosband owers larger aount on his around £20,000.00 am i obliged to use my inheritence to pay husbands iva of..can i ask them to get a reduced rate on husband one,,
also do i have to give them all the inheritence it over £120,000.00 or just the figure they work out for me on a f7 payment,,
any help would be appreciated.
kind regards babs
Sara (Debt Camel) says
Yes you will need to pay your debts, plus the IVA fees in full. Payplan should have told you how much this is. They will not take all your inheritance, only what is needed to settle your IVA in full.
You should not have to use your windfall to repay your husband’s IVA in full. I can’t say it is totally impossible as an IVA could have some unusual wording, but it would not be normal at all for your inheritance to have to be used against his debts. You could offer a full and final settlement of what the rest of his IVA payments would be.
Are you buying or renting?
barbara theobold says
we own our own house but we are both disabled my husband had to finish work two years ago with ill health,
we also have our two young grandaughter living permantly with us now as well.
im waiting on payplan to get back to regarding the fees.
just panicked they would want all the money given to them
i have got things for the girls ect to pay outof it .
Sara (Debt Camel) says
I hope you don’t have any reason to be worried here. How long ago did you send the details to Payplan?
Do you have a mortgage?
barbara theobold says
hi only yesterday waiting on reply.
we own the house outright
Sara (Debt Camel) says
OK, well you have to give them a week or so to sort out the figures.
Do you have the inheritance money now or is it with the executors? Do you have urgent need for any of the money in weeks rather than months?
Barbara theobold says
Yes I have the money now. Have got some things I need to pay out of it I but not a lot of it.
Can I keep the money and just pay them the amount they tell me. I’m really not wanting them to have all of it. Can I refuse as I don’t owe that much in full
i was the executor, it was my brother that died i am his next of kin everything went to me. i sold the house hence the money,
Sara (Debt Camel) says
I suggest that you tell Payplan that you have some urgent expenses which you need to pay for from the inheritance, list what they are, and ask them to confirm that this will not be a problem as the inheritance is so much larger than your IVA debts and fees.
Barbara theobold says
I will do thank you. Would I be able to keep the money and just pay mine of. Or do they have to have it as I’m very reluctant to do this as my debt is small in comparison to the inheritance. Sorry to keep asking you
Sara (Debt Camel) says
I don’t know what your IVA says. Standard ones include terms that say:
– you have to tell your IVA firm about any “after-acquired property” (that is any assets you get after your IVA starts such as this inheritance), which you have already done
– you need your IVA firm to agree in writing before you dispose of any assets, which includes these after-acquired assets
– the IVA firm may claim (that is make you give them) any after-acquired assets
– after-acquired assets must only be realised to the extent necessary to repay the IVA debts in full and the IVA fees.
Given the inheritance is so much more than your IVA debts, I can’t see why Payplan would want to take it all and sit on for months while they work out the final figures. I do expect them to be reasonable about this. I am just saying, put yourself in the clear by telling them what you need to spend money urgently on.
Come back if you have any problems with this!
Scott Dunn says
Dear Sarah,
I lent my brother 4k in 2013, and we signed a loan agreement in that he would an amount each month till paid in full. in short he did not and still owes me the money.
Our mother died in January 2017 and she felt so annoyed at his reluctance to pay me left his share of 4 k to me in the will which was documented. when the assets were released it came out light my brother had bigger debt problems and was declared bankrupt in October 2017, and that his share ( Orignially £16800-4000) , was then taken by the official receiver much to my annoyance.
i have asked the OR what I will get back but thyme are painfully slow in getting back to me and it seems grossly unfair i am competing against major utilities and banks for a meagre share £16800 . please can you give me any advice as it seems so unfair and we had no inclination the brother was bankrupt at the time.
scott Dunn
Sara (Debt Camel) says
Hi Scott,
can I double check the dates in case there was a typo – your mother died in the January before your brother went bankrupt in October?
I am wondering if there was some problem with the way your mum’s will was worded, otherwise I am not sure why the executor (who was it?) passed the money that should have gone to you to the OR.
When was the money sent to the OR?
Tristan says
Hi.
I went bankrupt in October last year. January my mother was diagnosed with terminal cancer.
She is fading fast and is unlikely to live much longer. I have no brothers or sisters, she has very little in savings (around 1k), her funeral plan is all paid for.
With mums cancer, it has metastasised to her brain and as such, there have been talks about making me Lasting power of attorney.
I have read I can’t undergo this as an discharged bankruptee. Is this correct and, if so, who takes charge of her affairs? In a bit of a panic here.
Sara (Debt Camel) says
I’m sorry to hear about your mum. It is correct you can’t have a LPA over property and financial affairs before you are discharged in October. Her affairs don’t sound complicated, is there something that is particularly concerning you? Is there a Macmillan centre at the hospital she goes to – they are often very good at sorting out practical situations.
Tristan says
Not that she went to. I will try and contact them. She is getting a refund from a funeral plan that she paid into, and has about 1k in a deposit account which was supposed to be paying for house clearers and for an extra month’s rent to buy extra time to clear the place. There’s a lot of stuff and I’m disabled so sorting through will take time. I’m worried that the money is going to be swallowed up by her overdraft and credit card. I’m on benefits as it is so can’t afford this myself. Our solicitor friend has made a letter making me executor only a couple of weeks ago before she was taken in. She is currently non compus mentus either so can’t make anyone else POA. I feel this bankruptcy whilst, in the short term was the right thing to do, on reflection has caused more longer lasting damage.
Tristan says
I should explain, the funeral plan was about 6 months away from being paid off, but the plan didn’t meet her requirements so she chose a different funeral home, the same ones who buried my father. The refund is due to hit her account in just over a week, but it’s likely she won’t be able to pay the new funeral home now herself.
Sara (Debt Camel) says
The funeral won’t be a problem. Funeral costs are the top priority for an estate to cover, they come before any debt repayments. Tell the bank and they will release the money from her account to you to pay for the funeral.