A discharge of bankruptcy is an order of the court that says that the bankrupt person has fulfilled his or her obligations under the bankruptcy proceedings. Either all debts have been paid, or more likely, the property that was available for paying debts was divided up among creditors so that they were paid in part. While a person is undergoing the process and the court has not yet discharged him or her, any surplus income not needed for essentials is paid to the trustee in bankruptcy to be divided among the creditors.
If the person who is in bankruptcy is the beneficiary of an estate of someone who passed away, the bankrupt person's entire share of the estate will go to the trustee in bankruptcy. The trustee will use as much of the inheritance as is needed to pay all of the debts, even if this means the whole inheritance. If the trustee doesn't need all of the inheritance to pay the debts, then the surplus amount will be paid to the bankrupt person.
The bankrupt person can't legally waive his inheritance (i.e. decide he doesn't want it), and he can't assign it to someone else (i.e. say that he wants his inheritance paid to his wife or children or friends etc). The trustee in bankruptcy has complete control over the bankrupt person's incoming money. The executor of the estate has no choice but to send the inheritance cheque to the trustee in bankruptcy.
If the bankrupt person has been discharged by the court and later inherits money, he is free to receive it just like anyone else.
Bankruptcy can have disturbing effects on personal and professional life for longer duration. It affects your credit rating and borrowing capacity in near future. Hence, declaring bankruptcy should be considered as last resort.
ReplyDeleteJazzie, I agree. I bet that even those who do consider the pros and cons of declaring bankruptcy don't think of what would happen in the event someone left them an inheritance.
ReplyDeleteLynne
If my trustee has closed my file , and I receive an inheritence, then what?
ReplyDeleteIf by "closed my file" you mean that you've been discharged from bankruptcy, then you can receive your inheritance just as if you'd never been bankrupt. None of your inheritance will have to go to the trustee or the creditors.
ReplyDeleteLynne
If you are bankrupt and are beneficiary, can you hold off on cashing the cheque until bankruptcy is over if its only a few months from discharge?
ReplyDeleteNot legally, no.
DeleteLynne
I inherited 29000 when my mother passed away in 2011 I was in bankruptcy and as soon as I got the cheque I made sure it went to pay the creditors the 22,000 I owed them. I am now discharged from bankruptcy and recieved a letter the other day stating my creditors have been paid and also that my trustee was taking the remainder of the inheritance to pay for his fees is he allowed to do that or is he screwing with me because I was in bankruptcy
ReplyDeleteHi Paul,
DeleteYes a trustee is allowed to take fees from the funds, but I hope he has at least given you a written accounting of why his fees are $7,000.
Lynne
As an executor to an estate I have a sibling that has advised me he is in bankruptcy and provided the name of the trustee for his bankruptcy. The trustee has advised me verbally of my requirement to forward my siblings portion to him which will be used to pay the creditors and then any remaining portion will be available to be paid to my sibling. When I asked the trustee to provide legal documents to support the request he advised that I did not need any and it is acceptable to proceed on his verbal request as my sibling would have to forward the cheques to him anyway if I was to pay it to him. Is that correct? I do not feel comfortable paying it out without a written request supported by legal documents.
ReplyDeleteThanks
D
Hi D,
DeleteExecutors should always try to "paper" their files to show why they paid out money or where money came from. The trustee should send you a letter confirming he is the trustee in bankruptcy and that funds owing to the bankrupt should be paid to him. I don't know if additional paperwork would really be adding much, but that's your call.
Lynne
Thank you for sharing this information. I've been trying to find information on bankruptcies in Canada, so this is great to know.
ReplyDeleteI'm an executor for a family member who died 2 months ago. One of the beneficiaries just discharged her bankruptcy this week. Probate isn't done yet and money won't likely be paid out for a few months yet. Is this beneficiary entitled to her share at that time? Thanks for you help.
ReplyDeleteGreat question! The beneficiary was in bankruptcy at the time of the testator's death, and it's my understanding that such inheritances must be reported to the bankruptcy trustee. This is to prevent executors from stalling on paying out the inheritance to avoid the bankruptcy. Since the beneficiary has been discharged, it seems unlikely that the trustee will want to receive the inheritance. If the beneficiary doesn't want to report the inheritance, please remember that you may be personally liable for paying out money improperly. Be on the safe side and report it if the beneficiary does not.
DeleteLynne
Hi Lynne,
ReplyDeleteThanks for all this great information. I have a further one: As a trustee/executor of an estate is it possible to keep all the funds in a trust rather than dispersing them to the beneficiaries who are in bankruptcy? Or would you be forced to disperse them in a certain timeframe?
Also, is it correct that if the trustee lives abroad, execution of the will must follow the laws of the country of residence of the trustee?
thank you!
If the beneficiary was in bankruptcy at the time the testator died, your duty as executor is to pay the beneficiary's entire share to the bankruptcy trustee. They can use as much of the inheritance as is needed to pay off the bankruptcy. Any funds that are not used up will be paid by the bankruptcy trustee to the beneficiary. Not complying with these rules would be fraudulent on your part, and seriously, who needs that?
DeleteYes, the general rule of trusts is that the trust lives where the trustee lives. There could be exceptions. Take your paperwork to a local lawyer if you need more detail.
Lynne
Can a person who is in bankruptcy still act as the Executor of an estate?
ReplyDeleteWhat if the spouse of someone in bankruptcy inherits? And does it make any difference if that spouse has been discharged from bankruptcy?
ReplyDeleteWhat if the spouse of someone in bankruptcy inherits? And what if that spouse has been discharged from bankruptcy?
ReplyDeleteA person who had been discharged from bankruptcy at the time the deceased died will be treated as anyone else would be. If a spouse inherits, it has nothing to do with the person who is in bankruptcy. They are two people, after all.
DeleteLynne
Awesomely useful blog...thanks in advance!
ReplyDeleteStrange question, strange scenario.
Parent (non bankrupt) will be leaving an inheritance
Child (about to file for bankruptcy with discharge certainly years away)
Is there a legal way for the parent to have a will drafted so as to set terms on the payment of the inheritance?
So, could the parent say in the will, that s/he wants the inheritance to go to the child only after the bankruptcy has been discharged? Could that statement in the will be binding & could it protect the bankrupt (undischarged) child?
A convoluted situation... but it's hard to know who to consult about this ind of thing.
So if your in Bankruptsy and two mo's from discharged and just been told that your a beneficiary, but have not yet told the trustee,because technically I have not received any surplus income. What will happen if the person is discharger and then receive the money...?
ReplyDeleteI guess my question is at what point do I need to tell the trustee is it when I have the money or when I am sent notification that I am to receive money in the future?
The key point of timing is whether you were still in bankruptcy at the time the person died and left you money, not when you receive the money. Believe me, you are not the first person who thought they could beat the system on a technicality, nor will you be the first to find out you can't.
DeleteLynne
Hello.
ReplyDeleteWhat happens if you receive an inheritance during the time you are declared an "Undischarged Bankrupt"?
If you choose not to declare bankruptcy, what can creditors do if you receive an inheritance within two years of last credit activity? What can they do after two years?
Thank you.
--- Please revise last post. ---
ReplyDeleteSorry, should have been more specific as per the first question.
What happens if the courts REFUSE your discharge INDEFINITELY. What happens if you receive an inheritance anytime in the future?
Second question as stated.
Thanks!
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