What Is An Insolvent Estate?

What Happens With an Insolvent Estate?An insolvent estate is when a deceased person’s debts are greater than the total value of assets, and therefore money is owed to their creditors. The rules of bankruptcy apply to insolvent estates, this means that groups of creditors must be paid in a specific order of priority.

When the liabilities of an estate exceed its assets, it is an insolvent estate. Solicitors who serve as executors or provide guidance to personal representatives encounter unique challenges when managing an estate that might be insolvent.

Failing to adhere to the stipulations outlined in the Administration of Insolvent Estates of Deceased Persons Order 1986 (Insolvent Estates Order) can expose them to personal liability.

This order sets out the legal framework and guidelines for handling estates with insufficient assets to cover their debts, helping ensure fair and orderly distribution to creditors and beneficiaries while protecting those responsible for the estate administration from legal repercussions.

What happens with an Insolvent Estate?

Debts still need to be dealt with after death. According to the law in England and Wales this means the responsibility to deal with the situation falls to the ‘personal representative’ (the executor or administrator).

The personal representative will have the task of settling the insolvent debt via the appropriate legal means. This may mean taking professional advice initially, but afterwards the first step will be to ascertain what type of debts remain outstanding.

For example, if the debts were held jointly with another party, the debt becomes that individuals responsibility.

If the debts were held only by the deceased, it may be that a life insurance policy could pay the debts off.

Where no insurance exists, the Personal Representative then has the task of administering the estate in the interests of those creditors owed money.

The order in which debts should be paid

There exists a legally mandated hierarchy for settling debts from an estate, outlined as follows:

1. Secured creditors: Secured creditors have the primary claim on the assets securing the debt, such as a mortgage on a property or a loan for a car. If the asset’s value doesn’t cover the entire debt, the remaining balance shifts to the unsecured creditors.

2. Funeral expenses: Funeral costs should be reasonable and proportionate to the estate’s size. It’s essential to ensure that funds allocated to a funeral do not deplete the estate to the detriment of other substantial debts. Permanent memorials like gravestones are distinct from funeral expenses. Family members who personally cover funeral expenses may encounter difficulties in recovering those funds if other creditors are involved.

3. Testamentary expenses: These are expenses incurred during the estate’s administration. Keeping meticulous records and retaining receipts for expenditures such as travel, postage, and other administrative costs is essential. Proof of posting certificates from a Post Office can be acquired at no cost.

4. Preferred debts and Preferential debts: These types of debts are rare and apply in limited cases. Preferred debts may involve wages owed to employees, particularly if the deceased received direct payments for employing carers.

5. Unsecured creditors: This category encompasses debts like those owed to government entities, utility bills, bank loans, credit card debts, and store card debts.

6. Interest on unsecured loans: Interest accruing on unsecured loans falls into this category.

7. Deferred debts: Informal loans among family members represent an example of deferred debts.

It’s important to note that these debts must be settled strictly in this order, with each category taking precedence over the subsequent one. All debts within a category must be paid in full before moving to the next. If there isn’t enough money to fully clear a specific category of debts, funds should be allocated proportionately to the amount owed.

In instances where the estate’s debts are relatively minor, informal arrangements with creditors may be feasible. However, in cases of an insolvent estate, it’s crucial to adhere to this legal framework to ensure a fair and equitable distribution to creditors and beneficiaries while mitigating the risk of personal liability for those overseeing the estate.

Solvent Estate vs Insolvent Estate

There must actually be enough money to pay off the debts. To check this is the case, the Personal Representative will need to calculate the total value of the deceased person’s Estate (meaning everything he/she owned), and the total value of the debts owed. This can range from funeral costs, utility bills, council tax and credit card bills to outstanding mortgage loans.

Solvent Estate

If the total value of the Estate is greater than the total value of the debts, it is known as having a Solvent Estate. This means there are sufficient funds available, so the Personal Representative can continue to administer the Estate, and liquidate (sell) the Estate assets and pay off the debts and distribute the remaining assets to the beneficiaries.

Insolvent Estate

If the value of the debt is greater than the value of the Estate, it’s known as an Insolvent Estate. This will create difficulties for the Personal Representative, as the Estate must be administered in the interests of the creditors. This makes the process very different, and if any mistakes are made, the Personal Representative could be held personally liable.

Bankruptcy rules on death

If a person has died, their debts are not automatically discharged. Some of the debt such as a mortgage might be covered by an insurance policy, or the surviving partner might take over the debt if it is held in joint names, but other debts in the sole name of the deceased will have to be repaid from the estate.

Should the deceased have a bankruptcy order made against them prior to their death, apart from certain amendments being applied, the bankruptcy process continues as normal. Otherwise, the rules that have been laid down in the Administration of Insolvent Estates of Deceased Persons Order, 1986, will be administrated

Insolvency administration order

Before the deceased estate can be dealt with an insolvency administration order is required. The deceased’s personal representative usually will make an application for this, this is usually the executor as named in the will, or if they died intestate, the appointed estate administrator.

If a creditor can demonstrate that it is “reasonably probable” that the estate is in fact insolvent they can also apply for an insolvency administration order.

An interim receiver will sometime be appointed if thought necessary to protect the assets of the estate until the petition is heard by the courts.

Steve Jones Profile
Insolvency & Restructuring Expert at Business Insolvency Helpline

With over three decades of experience in the business and turnaround sector, Steve Jones is one of the founders of Business Insolvency Helpline. With specialist knowledge of Insolvency, Liquidations, Administration, Pre-packs, CVA, MVL, Restructuring Advice and Company investment.