Can Creditors or a Bankruptcy Trustee Take Your Inheritance?

If you owe money, or you are in the middle of a bankruptcy, news that a relative has left you something can bring a hard question: will it go to your creditors? The concern is common, and it often comes up at exactly the wrong moment, when you have just lost someone.

The rules turn on timing and on the type of property. This article explains what the federal Bankruptcy and Insolvency Act says about property that is divisible among creditors, how that can reach an inheritance, and what to ask before the money is paid to you.

What bankruptcy law counts as divisible property

Under section 67(1) of the Bankruptcy and Insolvency Act, the property divisible among creditors excludes property held in trust for another person, property exempt from seizure under provincial law, and RRSP, RRIF and RDSP property, except contributions made in the 12 months before bankruptcy. Everything else the bankrupt holds at the time of bankruptcy, or acquires before discharge, is included.

That last part is the one that matters for inheritances. Because property acquired before discharge is included, an inheritance received before discharge can be captured.

Timing: before bankruptcy, during it, and after discharge

An expectation of inheriting is not the same as receiving. A will can change, an estate can take time to settle, and a gift may be reduced by debts and taxes. Still, if you are bankrupt and learn that you are a beneficiary, do not assume it can be ignored.

How the estate process fits in

An estate trustee who agrees to act is responsible for winding up the deceased's affairs and paying taxes, bills and debts. They collect the assets and distribute what remains. The date you actually receive an inheritance may fall before or after a discharge date, which is why it is worth asking about timing early.

Some assets pass outside the will. A designated beneficiary, for example on an insurance policy or joint bank account, receives certain assets or funds after death. Whether creditors can reach those amounts depends on the type of asset and your circumstances, and is worth confirming with a lawyer.

If you are the estate trustee as well as a beneficiary, how the bankruptcy rules apply to you personally depends on the facts, so it is worth confirming with a lawyer.

Common mistakes to avoid

• Moving or hiding an inheritance, or asking the estate trustee to delay or redirect it, without advice. This can create serious problems.
• Assuming an RRSP or RRIF you inherit is automatically protected because the Act excludes RRSP and RRIF property of the bankrupt. Whether that exclusion applies to an inherited plan depends on the facts.
• Spending the money quickly in the hope that it will not be noticed.
• Waiting until after the money arrives to ask questions.

What to do next

• Write down the date of your bankruptcy, any discharge date, and any debts outside the bankruptcy.
• Ask the estate trustee what you are likely to receive, in what form, and the expected timing.
• Keep copies of the will, any beneficiary designations, and letters from the estate.
• Speak with your licensed insolvency trustee or a lawyer before accepting or using the money.
• If you are considering bankruptcy and expect to inherit, tell your licensed insolvency trustee or a lawyer early so the timing can be planned honestly.
• If the estate seems delayed or unclear, ask a lawyer about your rights as a beneficiary.

Frequently asked questions