A reader has asked if my recent article on redundancy payments and bankruptcy also applies to inheriting money or assets when you are bankrupt. The answer is “Yes”, but there are a few extra points to consider.
The date of death is the key date
You become entitled to an inheritance as soon as the person has died, so it legally forms one of your assets from this point. There are three cases depending on when the date of death is in relation to your bankrupty :
- the date of death is before you went bankrupt Here your inheritance is an asset that you owned when you went bankrupt and it therefore belongs to the OR.
- the date of death is after bankruptcy but before discharge Here the money you inherit is an “after-acquired asset”. You should to notify the OR about your inheritance and the OR will claim it.
- the date of death is after discharge In this case the money is all yours. The Official Receiver can’t claim any of it and you do not need to notify him about it, even if you have a BRO or a BRU.
It can take a long while to sort out an estate and distribute the money, especially if a house has to be sold. If the money is being divided between you and some other people, you may not know for a year or even two how much it will actually be. But this doesn’t affect the fact that it is date of death that matters. So for example, there is no point in suggesting to your brother who is the executor that he ‘goes slow’ so that you get discharged before he distributes the money.
nb I have simplified what happens legally in this description, concentrating on whether you will eventually get the legacy. If you would like to find out the details, see this Law Society Practice Note which provides explanations about “the thing in action” (that is an actual legal term!) and what the beneficiary, executors and trustee in bankruptcy are obliged to do.
Is there any way to avoid the OR taking my inheritance?
Normally if you inherit money or assets and you would rather it went to someone else, you can use a Deed of Variation to arrange this. But you can’t use this to avoid the OR getting the money. You can only sign the Deed of Variation if you are due to get the money, but your bankruptcy means that effectively the money isn’t yours so you can’t pass it on to anyone else.
If you want to ensure the OR won’t get the money, the only way is to suggest to the person leaving the money that they change their will to leave it to someone else, for example to your children, or a sibling. More complicated possibilities involving trusts could be set up, but these can be expensive. If there is a lot of money involved, the person should to talk to a solicitor who has experience in these matters.
What happens to my IPA?
If the person has died after your discharge, so you do get the inheritance, if you then invest it so it produces income, that income should be declared to the OR. Your IPA may increase because of this extra income. But the IPA won’t be increased just because you now have money in the bank. If you didn’t have an IPA set because your surplus income was too low, this can’t be changed because an IPA can’t applied after your discharge.
Can I cancel my bankruptcy?
Yes if your inheritance is large enough. If you are inheriting a lot of money then your bankruptcy can be annulled. You will have to pay not just the amount of your debts that went into your bankruptcy, but also the costs of the Official Receiver, Trustee etc that have resulted. These costs can be very high. I would suggest you should make sure your own financial future is extremely secure before thinking of doing this, so first sort out your future housing, make sure your pension arrangements are good etc.
How does discharge from bankruptcy work?
A checklist for going bankrupt
Bankruptcy – the big questions
Michael Orr says
Hi,
Can the testator specify that a beneficiary can only inherit if they are not bankrupt, but if they are, their inheritance is to pass into some kind of ‘protected’ account until they are discharged?
Sara (Debt Camel) says
So far as I know (and you would need to talk to a solicitor who specialises in Wills) you can word a Will to say that if someone is bankrupt then their share should go to another party. Which could be some form of legal trust. But I doubt it would be possible for the trust to be set up to return the money to the person when they are discharged from bankruptcy.
Michael Orr says
Thank you for the very swift reply!
MO
Jane says
I have a similar question. I am verging on bankruptcy and am due to inherit some money. I feel that morally I owe some money to my son since over the years I have spent far more on my daughter, due to issues which she has, than I have spent on him. This, to me, is the most important of my debts. The remaining money would pay off a decent chunk of my debts, but probably not enough to reduce monthly repayments to a level which I could afford each month without borrowing more. My question is, would I be able to just give the solicitor my son’s bank details, get it all paid to him to look after, and get rid of the debts via bankruptcy. I have read that banks don’t match up bank details to names but not sure if this is true? I know this is probably legally and morally wrong, but to be honest I don’t much care. I’d just like to know if it is possible, and whether it could potentially get my son into trouble. Alternatively, I wonder if the lenders would take the money, which would be maybe two thirds of what I owe, as a settlement if they then closed the accounts. Thank you.
Sara (Debt Camel) says
Have you already defaulted on the accounts? How much do you owe overall, how much are you inheriting and how much do you want to give your son?
George M says
Please can you advise? I am currently bankrupt with 4 months remaining until discharge, however, the OR ordered a BRU on me, which I accepted and will end March 2024. I understand any inheritance I might receive after the bankruptcy itself ends (July 2020) does not need to be declared, so long as the date of death is after the bankruptcy discharge date. 1) Do I need to advise the OR of any small amounts, ie. cash gifts, whilst I am still under the BRU. 2) Can I travel abroad for a period of 4-6 weeks without needing to tell the OR (NB: I reside and filed for bankruptcy in England). 3) Is the OR likely to review my bank account activity at certain times during the BRU. 4) Can I open an alternative cash account with another bank without having to inform the OR (I realise I would need to inform the back I am bankrupt when opening the account) and will the OR have access to this. Thank you for taking the time to read through my queries.
Sara (Debt Camel) says
Are you paying an IPA?
George M says
Hi,
No, I’m not paying an IPA due to having UC/PIP benefits as my only source of income. Do you happen to know if I can negotiate the length of the BRU with the OR once I have signed and accepted it. It seems quite severe for the amount.
Sara (Debt Camel) says
The simple way to get answers to your questions that you know are right for your case is to ask your OR. You should have disputed the length of the BRU before agreeing to it, but why do you care how long it is?
George says
My main concern is whether my spending history will be reviewed whilst I am still under BRU and could this go against me, ie. taking holidays, spending on non-essential items, using my debit card abroad when the money could/should have been paid to my creditors. Obviously I don’t want to run the risk of the BRU being extended further. I have NOT been asked to enter into an IPA, so does that mean I can do what I like with any excess cash I have left over at the end of the month?
Sara (Debt Camel) says
I suggest you talk to your OR’s office. That is the best way to have your mind set at rest.
kel says
my bankruptcy ends tomorrow! but my inheritence is looming (not amounts stated as of yet so could be a few weeks) but the bankruptcy still want the money i dont think thats fair as it ends tomorrow
Sara (Debt Camel) says
It is the date of death that matters – if this is before your discharged, the money has to go to the official Receiver. It doesn’t matter when the money is actually distributed.
kel says
all of it? even if its more than i owe?
Sara (Debt Camel) says
You will have to pay off what you owed plus the OR’s costs, which can be high. Have you talked to the OR about this? If not you need to do this.
kel says
what are ORS costs?
Sara (Debt Camel) says
The Official Receiver’s costs.
Stewart Pearson says
Hi in 20007 I was made bankrupt but up to this date I was never discharged 13 year’s on, this was because of a disagreement regards paperwork. In 2013 my mum died and I was left over £7000 but I never received any of the money as the probate office informed the official receiver’s that I was left this money,is this right they can do this
Many thanks
Sara (Debt Camel) says
It was very foolish not to resolve that paperwork disagreement. If you want someone to look at the details of your case, talk to National Debtline on 0808 808 4000
stewart pearson says
It was not foolish at all because I gave all the paper work requested then never heard any more from them until the death of my mother then they took the money
Sara (Debt Camel) says
Then talk to National Debtline if you feel it was the OR’s fault and that your bankruptcy should have been discharged before your mum died . But you have left it a very long while to challenge this.
Billy says
My dad recently passed away and left me his half of the house. My mum still owns half and lives in the property but I am bankrupt and not discharged until August. Can my mum lose the house because of me!
Sara (Debt Camel) says
Potentially, yes. I suppose your mum may be able to challenge the Will. Or get a mortgage and buy back your half of the house.
john says
my grandmother died leaving her estate to be divided between her 4 children. My father was already dead do his 1/4 of the estate was to be shared between my brother and I. The estate was not to be divided until her oldest son was still alive and living in the house. He has just died so the estate is to be divided.
Unfortunately I filed for bankruptcy some years ago. After my Grandmother died but long before her oldest son died. Is my share still liable to be taken by the OR?
Please remove surname from my comment above
Sara (Debt Camel) says
So far as I know, the right to inherit that share when the eldest son died would have become the property of the OR when you went bankrupt.
john says
OK thank you