Bankruptcy shouldn’t be taken lightly, but it’s a way to resolve your debts when you have exhausted all other options.

One of the common concerns is whether you’ll lose an inheritance or windfall during bankruptcy.

You might be wondering what happens if you receive money before your bankruptcy is discharged? Will I lose it all, or is it protected?

In this guide, we will answer these questions.

What is a windfall?

A windfall describes any money or property you may receive while in bankruptcy, such as an inheritance, lottery win, work bonus or a gift.

Receiving an inheritance or windfall before bankruptcy

If you expect to receive money or property, such as an inheritance or windfall, tell your Licensed Insolvency Trustee before you file for bankruptcy so they can advise on the best course of action.

You must disclose all assets and income before you file for bankruptcy.

Before considering bankruptcy, ask yourself:

  • How much are you likely to receive?
  • When are you likely to receive this money?
  • Can this money clear your debts?

If the amount is large enough to reduce or clear your debts, and you are due the money soon, it may be prudent to hold off on filing bankruptcy and wait for the funds.

However, if you are already under pressure from legal action or wage garnishments, it might not be possible to wait.

Arrange a free consultation: a Licensed Insolvency Trustee can advise on the best strategy for dealing with an inheritance or windfall before bankruptcy.

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Receiving an inheritance or windfall during bankruptcy

It turns out that if you receive any money or property during your bankruptcy, it becomes part of your bankruptcy estate, with the proceeds distributed to your creditors.

Under the Bankruptcy and Insolvency Act, your trustee must pay this money into your bankruptcy and distribute it to your creditors. This process applies to all assets that you may receive while bankrupt.

If this happens to you, you must notify your Licensed Insolvency Trustee, who will advise on the next steps.

As stated under Directive No. 25 of the Office of the Superintendent of Bankruptcy Canada:

Except for property held in trust by the bankrupt or property exempt from execution or seizure, all property of the bankrupt, wherever situated at the date of bankruptcy or that may be acquired by or devolve on him or her before the discharge, is available for the creditors within the meaning of section 67 of the Bankruptcy and Insolvency Act.

Put another way: any asset, such as a windfall, must be seized by your Licensed Insolvency Trustee during your bankruptcy.

The good news is if your windfall allows you to pay off all your creditors in full, along with any trustee fees, any money left over will be given back to you.

Although this may seem a bit unfair, it may allow you to be discharged from your bankruptcy early.

Alternatively, your trustee may suggest that you switch from bankruptcy to a consumer proposal instead, using part of your windfall to pay off your debts at a reduced rate while allowing you to keep any future assets.

If you receive an inheritance or windfall, notify your trustee

If you receive any windfall or a lump sum of any kind during your bankruptcy, you must tell your Licensed Insolvency Trustee.

Failure to disclose this is in breach of your bankruptcy duties as detailed in the Bankruptcy and Insolvency Act and could prevent you from being discharged from your bankruptcy.

Even if you don’t expect to receive the amount until after your discharge date, you still must tell your trustee straight away.

If you receive an inheritance or windfall after bankruptcy

Needless to say, if you receive any windfall after you are discharged from your bankruptcy, you can keep the money.

Consider a consumer proposal

A consumer proposal can prevent the above scenarios. Unlike a bankruptcy, your assets are protected in a consumer proposal.

The best part is that you can keep any windfall or inheritance in a proposal as long as you continue to make your fixed payments as agreed. Alternatively, you could pay off your consumer proposal early.

Your payments don’t increase in a consumer proposal, even if your income increases. In fact, you don’t even need to tell your trustee if your income changes.

See also: Consumer proposal vs bankruptcy.

Conclusion

If you receive an inheritance or windfall during bankruptcy, you must notify your Licensed Insolvency Trustee so that this money can be distributed to your creditors.

If you expect to receive money and are currently in the middle of bankruptcy, speak to your trustee, who will help you plan for this.

If you end up receiving money or property while in bankruptcy, it might be possible to repay your creditors in full to have your bankruptcy annulled.

Alternatively, you may be able to switch to a consumer proposal and repay part of what you owe. Your trustee can help you negotiate with your creditors if you decide to make the switch.

If you’re considering filing for bankruptcy and you have questions about an inheritance or windfall, connect with an experienced Licensed Insolvency Trustee in your area today.

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