Receiving An Inheritance During Debt Settlement Arrangements

7th May 2014

You may be considering starting a DSA (debt settlement arrangement) to tackle debts which are no longer affordable. This could be an excellent way to balance your budget, restore some financial control and to move forward from your debts altogether in a few years. However, what happens if you inherit or you receive a large gift of money during the debt deal? What would happen if you won the lottery or another type of windfall came your way?

Most of us would consider this prospect quite unlikely, but the fact of the matter is that lump sums (or assets) can come into people’s possession at quite unpredictable times.

It might seem to be a reasonable assumption that this money would be yours to do as you wish provided that you stick to the terms of the debt deal. After all, the creditors agreed to those terms at the start. It might also be reasonably assumed that you could count your blessings and pay off enough debt to be able to leave your DSA and carry on paying whatever reduced amount of debt is left on your own.

Such assumptions are likely to be wrong. A committee is currently working on a protocol which will determine how situations like this will be dealt with during debt settlement arrangements. It’s believed that they’re minded to ensure that the control of a substantial inheritance, windfall or gift is held by your personal insolvency practitioner rather than you.

Indeed, it might be the case that you receive only the first €500 in such a scenario. This could result in large sums of money falling under the control of the PIP. What would they use the money for?

It could certainly be used to repay the debts, quite possibly in full (even if the banks originally agreed to write off some of what was owed). Where the money received is sufficiently large it might even be used to service a level of interest on the debt and/or to cover the fees for running the DSA. At the time of writing the full scope of how this money might be used hasn’t been defined.

For the banks, such a rule might encourage them to accept more debt settlement arrangements. They may well consider that they should only be expected to write off the debts that people cannot afford to repay, rather than writing off debt which could now affordably be repaid.

Similar rules apply elsewhere. The Individual Voluntary Arrangement (IVA) and Protected Trust Deeds are similar types of arrangement used in different parts of the United Kingdom. Both would usually draw in an inheritance, a windfall or a large gift to help repay more to the creditors.

Does this mean that you should avoid starting a Debt Settlement Arrangement? A few people might be expecting to receive a large sum of money, perhaps because an elderly relative is unwell for example. In this scenario it would be worth considering this possibility when choosing how best to tackle the debts. For most people however the benefits of a DSA might outweigh the potential risk of the loss of a totally unexpected windfall.

When the protocol is completed we will report further on the final outcome of their considerations on this and other issues.