Bankruptcy: treatment of an inheritance

Once a bankruptcy order has been made by the court, an official receiver will be appointed trustee in bankruptcy (unless a private sector insolvency practitioner is appointed). As at the date of the order, the bankrupt’s estate vests in the trustee. The bankrupt’s estate essentially consists of all the property which belongs to or is vested in the bankrupt at the commencement of the order. The function of the trustee is to collect in and sell the bankrupt’s assets and to make payments to creditors in accordance with the strict hierarchy set out in the Insolvency Act 1986 (IA 1986).

“Discharge from bankruptcy” is a legal term used to describe the process that frees a person from the restrictions of bankruptcy and releases them from most of the debts they owed at the date of the bankruptcy order. A bankrupt will usually be automatically discharged 12 months after the date of the bankruptcy order, even if no payments have yet been made to creditors. After discharge, the bankrupt is released from all bankruptcy debts and any property they acquire after discharge is theirs, the trustee cannot lay claim to it. However, property comprised in their estate at the time of the bankruptcy order remains under the control of the trustee to be sold for the benefit of the creditors.

Occasionally, an individual, whilst bankrupt, benefits from an inheritance (e.g., a gift of property or money). Any new asset obtained during the bankruptcy (i.e., after the date of the bankruptcy order and before the date of discharge) is referred to as “after-acquired property” and must be declared to the trustee. Under section 307 of the IA 1986, the trustee can make a claim to the property for the benefit of the creditors (subject to certain time limitations). In effect, any inheritance made to an undischarged bankrupt is potentially vulnerable to a claim by the trustee in bankruptcy. This briefing paper provides an outline of the position as it applies in England and Wales. Scotland has its own separate procedure for individual insolvency known as sequestration.