Bankrupt But Due to Inherit: Who Owns the Property?
Bankruptcy is a major decision that will have an impact on your finances for years to come. Far from being an ‘easy way out’, it can severely limit your financial freedom.
Inheritance is a vital consideration if you are thinking about bankruptcy. You must remember that petitioning for Bankruptcy could have a significant and detrimental impact on any future inheritance, and you may need to take steps to limit this impact.
What are the implications of bankruptcy?Bankruptcy has serious implications for your future financial situation. Bankruptcy is a last resort; it should be considered only when all other options have failed. As such, individuals who are declared bankrupt should be prepared to lose control of their assets.
Your assets will be assessed, and your Creditors will try to recover as much of their money as possible. This means that you are likely to lose large assets like your home, you may lose some of your income, and your ability to get credit will be severely curtailed.
What happens if I inherit while bankrupt?If you become entitled to an inheritance while you are still an Undischarged Bankrupt, it is likely that the trustees or Official Receiver will use the money you inherit to pay your creditors. That is to say, you will probably lose the inheritance.
There are a few things to remember here. First of all, the key consideration is when you become entitled to the money. This is normally judged to be the time at which the testator (that is, the individual who wrote the will) dies, rather than the date on which the money arrives in your bank account. This can be problematic for individuals approaching the end of bankruptcy.
Furthermore, if you are a beneficiary of a will before you are declared bankrupt, the inheritance is likely to be treated as an asset under your ownership. Again, this means that you are likely to lose the money.
How can I protect an inheritance?To begin with, it is vital that you do not try to hide an inheritance from the trustees or Official Receiver. If you do this you will be breaking the law, and there are significant repercussions. Do not kid yourself into thinking that an inheritance will go unnoticed; the Official Receiver will find it eventually.
That said, there are ways in which you can legitimately protect an inheritance. If you intend to petition for bankruptcy, you should consider asking the testator to use their will to establish a discretionary trust. In this arrangement, your portion of the inheritance will enter into trust upon the death of the testator. The trustees will have control over the assets that are placed in trust, and they will be able to give those assets to you once your bankruptcy has been discharged.
The trustees have a significant degree of power in this arrangement. It is therefore important that the appointed trustees are trustworthy. They might be family members or a professional organisation.
Trusts can be complicated, and you should remember that they could be subject to challenge in a bankruptcy situation. It is therefore important that you and the testator seek professional advice before taking any action.