Inheritance Issues in Bankruptcy.

• Author: Hoyes, J. Doug

When someone files for bankruptcy, they surrender all non-exempt assets to the licensed insolvency trustee for the benefit of their creditors. This includes not only assets they have at the time they file for bankruptcy, but also comprises of any assets that "devolve" on the bankrupt prior to discharge such as an inheritance "received" during bankruptcy.

In determining when an inheritance is received or devolved, the trustee will look at the date of death of the benefactor, not the date the will is read or the date money or assets are distributed. We can consider three possible scenarios that could occur:

1. Mark's father passed away before Mark filed for bankruptcy. Mark is entitled to an inheritance but the will is under probate and he doesn't expect money to be distributed for several months. Mark also has a wage garnishment so he has decided to file for bankruptcy to deal with his debts now. The bankruptcy estate will be entitled to the proceeds of Mark's father's estate, because Mark received the assets to the date of bankruptcy. Therefore, the assets from the estate are now the property of the trustee for the benefit of Mark's creditors.

2. Mark files for bankruptcy and unexpectedly he receives an inheritance from a distant Aunt while bankrupt. The proceeds of that inheritance must be paid into the estate to be distributed amongst Mark's creditors.

3. Mark filed for bankruptcy but has received his discharge. Two days after his discharge Mark's uncle passed away and left him a substantial inheritance. Because Mark is a discharged bankrupt, his bankruptcy is complete and he can keep his inheritance.

If an individual receives an asset rather than money in an inheritance, the trustee will realize on that asset. It is possible for the bankrupt to purchase that asset at fair market value from the trustee although, depending on the value, this may be difficult as they will not likely be able to obtain a loan while bankrupt.

It is important to know that failure of a bankrupt individual to disclose an inheritance would be an offence under the Bankruptcy & Insolvency Act and could result in their discharge being refused or suspended. It could also result in a conditional discharge order requiring additional terms of the bankrupt.

What should someone do if they have debts and require relief now, but has an elderly parent who may be leaving them an inheritance in the next few years?

One option would be to consider a consumer proposal. In a...