Inheriting money when bankrupt

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 :

1. 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.
2. 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.
3. 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.

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