Can someone inherit money or property once they have been declared bankrupt? Julie Hunter of Stephensons explains what happens when someone goes bankrupt and how this affects a beneficiary’s ability to inherit.

What happens when someone is declared bankrupt?

Once a person has been declared bankrupt, a trustee in bankruptcy is appointed and all of the bankrupt person’s property and assets amount to their ‘bankruptcy estate’.

The assets of the bankrupt, which make up the bankruptcy estate, are defined in Section 283 of the Insolvency Act 1986 and include all property in which the bankrupt has a beneficial interest at the date of the bankruptcy order, except items such as tools of trade and other items needed for work and everyday household items.

The estate then ‘vests’ in the trustee who realises all assets and distributes them to the bankrupt’s unsecured creditors on a pari passu basis – that is, they are treated equally.

What is a trustee in bankruptcy?

On the making of a bankruptcy order the Official Receiver is normally appointed as trustee in bankruptcy. If the debtor has a large estate an Insolvency Practitioner (IP) may be appointed as trustee.

The trustee in bankruptcy effectively takes control of the assets of a bankrupt and distributes funds to creditors according to the law. To achieve this, the trustee has wide ranging powers and responsibilities, including:

• to overturn any ‘void dispositions’ of property made after the date the bankruptcy petition was presented
• to compel the debtor and related parties to provide information relating to the bankrupt’s affairs
• to challenge dispositions made at an undervalue in the preceding 5 years or any preference given to a creditor to the disadvantage of the main body of creditors

Can someone inherit money or property when they are bankrupt?

Where a beneficiary (a person due to inherit from a deceased’s estate) is bankrupt, they are still entitled to inherit money or any other asset. However, any asset inherited will automatically vest in the trustee as part of the bankrupt’s estate for the benefit of creditors.

A bankruptcy order generally lasts for 12 months, after which the bankrupt is automatically discharged. In the event that a testator (the person who made the will) dies after the bankruptcy order was made but the administration of the deceased’s estate is not completed until after the bankrupt has been discharged, the inheritance will still vest in the trustee because it is regarded as having been a ‘chose in action’.

An administrator of an estate who is distributing inheritance to a bankrupt should do a bankruptcy search on the beneficiary and contact the trustee appointed. The trustee can advise whether the funds should be paid. If assets are paid directly to the bankrupt without the trustee’s consent, the administrator may be subject to a claim by the trustee for payment of a sum equal to the money or value of the asset distributed directly to the bankrupt.

Can you cancel a bankruptcy?

Normally a bankruptcy ends once the debtor is automatically discharged after 12 months, although that can be extended by the trustee on application to the court.

The debtor may apply to annul a bankruptcy order, either before or after they are discharged, but only on either of the following grounds:

1. The bankruptcy order should not have been made in the first place. This generally applies where the debt had been paid or secured at the time the order was made or if the debt is disputed.
2. The debts and expenses of the bankruptcy have been paid or secured to the court’s satisfaction.

Only the court can annul a bankruptcy order at its discretion. While the court can consider facts which were not put to the court that made the bankruptcy order, it will not revisit a decision based on arguments made at the hearing of the bankruptcy petition and dismissed or rejected by the court.

Once the bankruptcy order has been annulled all the individual’s assets re-vest back to the individual. However, they must first meet the costs and disbursements of the trustee in bankruptcy, unless the court finds that the petitioning creditor should pay those costs if the bankruptcy order should not to have been made.

About the author

Julie Hunter is a Senior Associate Solicitor in the commercial litigation department at the national law firm, Stephensons.

See also

What is the role of the trustee in bankruptcy?

What is the difference between a debtor's petition and a creditor's petition?

What is the forfeiture rule in probate?

What you need to know about the right of survivorship

Find out more

Insolvency Act 1986 (Legislation)

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Publication date: 30 November 2020

Any opinion expressed in this article is that of the author and the author alone, and does not necessarily represent that of The Gazette.