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.

If the executor or administrator dealing with the estate distributes funds incorrectly, or without realising that specific rules apply to insolvent estates, they may become personally liable for all misdirected monies

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.

A specific order of payment exists

As is the case when a person is made bankrupt, a specific order of priority exists with regard to the distribution of funds from an insolvent estate. This ‘hierarchy’ of payment ensures that certain categories of creditor are paid first, and begins with those holding security against one or more of the deceased’s assets.

So what is the full order of priority when it comes to making payments from an insolvent estate?

  • Secured creditors
  • Expenses of the funeral
  • Testamentary expenses
  • Preferential creditors
  • Unsecured creditors
  • Interest due on unsecured loans
  • Deferred debt (such as money loaned from a family member)

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.