When a friend or loved one passes away the last thing you’re likely to think about is how it could impact any debt solution you’re in now, or plan to enter in the future.
However, if you receive inheritance money from someone close to you it’s important to be aware of what this could mean for your finances – including any debt you owe.
In this guide we’ll discuss what an Individual Voluntary Arrangement (IVA) is and how inheritance money received could affect your arrangement.
What is an IVA?
An Individual Voluntary Arrangement (IVA) is a legally binding agreement between you and your creditors to repay what you owe over a period of time with affordable monthly payments.
Available to residents in England, Wales and Northern Ireland, this debt solution is often described as an alternative to bankruptcy.
You may consider an IVA if you’re struggling with priority debts such as council tax or rent arrears or unsecured debts like payday loans or credit card debt.
Once you enter an IVA your creditors aren’t permitted to take any further action against you and all interest and charges on debts owed are frozen.
As long as you stick to the terms of your agreement the remaining balance of the original debt will be written off.
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What is inheritance?
Inheritance refers to the process of passing of assets or money from one generation to another.
This usually happens between family members upon the death of grandparents or parents.
Gifted inheritance can vary from family to family. Sometimes you may receive money in what is often called a windfall payment.
However, inheritance can also include assets such as property or jewellery.
Can an IVA take my inheritance money?
As an IVA is a legally binding agreement between you and your creditors, you must adhere to all of the terms and conditions of the contract.
When you sign your IVA proposal you agree to put any windfall payment over £500 towards your IVA – that includes inheritance.
If a person dies and you are included in their will, any inheritance received will be contributed to your plan as outlined in the windfall clause in your IVA proposal.
The clause states that you must notify your insolvency practitioner or IVA company if you receive a windfall.
If you don’t inform your insolvency practitioner of your inheritance payment you could put your IVA agreement at risk and could result in you being made bankrupt.
How much of my inheritance will I need to pay into an IVA?
As already mentioned, your IVA arrangement will likely include a windfall clause.
It means that many inheritance received over £500 will be included in your arrangement.
You should be aware, an inheritance payment doesn’t only just refer to cash.
Inheritance items such as property, jewellery, or any big-ticket item with a high cash value will need to be put towards the debts owed.
This is because the money received should be used in favour of your creditors and should be used to pay back the debts.
Could I end my IVA early if I receive an inheritance?
If you receive a windfall, like inheritance money, you will likely continue to make monthly payments to your IVA company until the end of your arrangement.
The extra money will increase the amount you pay back to your original debt rather than shorten the length of the IVA.
However, there is an exception to this rule. If the inheritance payment received is large enough to pay the total amount originally owed, including fees, all the money inherited could be used to pay back your total debt with a lump sum.
If you are in the position to do this and finish the IVA earlier you’d no longer be required to continue to make monthly payments.
Can I keep any inheritance payments?
One of the most common questions about and IVA and inheritance money is whether you’ll be able to keep any or all the money received.
As already discussed the terms and conditions of an IVA proposal often states that any windfall, like inheritance payments, should be included into the arrangement.
However, it’s important to be aware that your insolvency practitioner does have the ability to allow you to keep some of the money.
This can be done at the discretion of your insolvency practitioner if they believe you have a reasonable requirement.
For example, you may be able to keep some inheritance for things like essential home improvements or to replace household items with the money left put towards your debts.
When you receive inheritance your insolvency practitioner will review your current financial circumstances.
They’ll do this by looking at your bank statements, income or benefits and how you’ve managed to pay towards your IVA debt so far, to make their decision.
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Is it against the law to hide inheritance money received when in an IVA?
An IVA is a legally binding agreement, that means that you are obligated by law to stick to the terms and conditions of your contract.
That means that you are required to inform your insolvency practitioner if you receive an inheritance or risk breaching your IVA.
If you breach the agreement it means that you’ll face the termination of your contract meaning you’ll be liable for the total amount of debt you owed before starting the IVA.
If your IVA fails you could also face bankruptcy. If you’re unable to repay your creditors you’ll be liable to pay all of the IVA debts as well as the other debts you may have had but weren’t included in the arrangement.
What happens if I receive inheritance money before an IVA?
If you’re struggling with debt and are considering entering debt solution, like an IVA, it’s important to be aware of how an inheritance payment could affect it.
If you receive a windfall payment before entering an IVA your creditors may request the funds are entered into the arrangement.
There is also a risk that your creditors may reject your IVA proposal if they believe the inheritance received should have been paid to them.
It’s important to seek professional debt advice, especially when you expect to receive an inheritance payment, to discuss the best debt solution for you.
Should I delay entering an IVA if I expect inheritance money?
Deciding when to enter an IVA is a personal choice.
That means if you’re expecting a windfall, like an inheritance payment, you may wish to hold off committing to an IVA start date.
However, as already mentioned, receiving inheritance before entering an IVA can have an impact on the debt solution.
If you spend the inheritance money instead of paying creditors the debts owed, the creditors may reject any future IVA agreement.
You should also avoid paying some of your creditors – especially family and friends – but not all before entering an IVA.
This is what is known as making a preferential payment and could mean other creditors not paid could reject your IVA proposal in the future.
What happens if an IVA application is rejected?
When you apply for an IVA the proposal must be accepted by at least 75% of creditors who hold at least 75% of your total amount of debt.
Put simply, it means that the creditors that are owed the highest amount vote against the agreement, the IVA may not go ahead.
Your IVA company will negotiate this meeting of creditors on your behalf and let you know of the outcome.
If your IVA agreement is rejected it means that you will be in the same position you were in prior to making the application.
In this instance you’ll need to negotiate with your individual creditors to manage what you owe.
While this may be disappointing, it’s important to continue to search for a debt solution that best suits your needs.
Alternative solutions, such as a debt management plan, also offer the opportunity to reduce monthly payments to an affordable amount but without writing off a percentage of the original debt.
Looking for more information about an IVA and inheritance?
Creditfix is the UK’s largest IVA provider and has helped more than 182,000 regain control of their finances.
We understand that living with debt isn’t easy and talking about it can be even harder.
That’s why our experts are proud to offer straightforward debt advice to help people find the best debt solution for their circumstances.
Where can I get more advice on IVA and inheritance – All you need to know and other debt solutions?
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