What is an insolvent estate? All you need to knowFebruary 12, 2021
An insolvent estate occurs when a person dies owing debts greater than the total value of their assets.
Dealing with an insolvent estate can be complex, and it’s very important that the process is handled correctly. In this article we’ll explain everything you need to know.
Repaying debts after death
If a person dies owing money, their debt still needs to be dealt with.
If the deceased person has any joint liabilities, like a mortgage or utilities, the debt can be transferred to the joint owner’s name.
However, personal debt in the sole name of the deceased cannot usually be inherited - it needs to be paid off using funds from the estate. It may also be repaid using an insurance policy, if there is one.
Dealing with the deceased person’s debts is the responsibility of the personal representative - the person who has been appointed to administer the estate.
The personal representative will be given access to the deceased person’s bank accounts, and will be able to sell the person’s property and other assets in order to repay their debts.
Is the estate insolvent?
To determine whether an estate is insolvent, the personal representative must work out the total value of everything the deceased person owned.
They must then calculate the total value of the debts the deceased person owed, such as outstanding mortgages, utility bills, credit card debts, council tax and funeral costs.
If the value of the estate exceeds the value of the debts, the estate is solvent. If this is the case, the personal representative can liquidate the assets to pay off the debts and then distribute the remainder of the funds to the beneficiaries.
If the debts exceed the value of the estate, then it is an insolvent estate. This makes the process of administering the estate more complex.
The administration of an insolvent estate is governed by the Administration of Insolvent Estates of Deceased Persons Order 1986 (DPO 1986), and must be done according to specific rules and regulations.
If the personal representative handles the process incorrectly or makes any mistakes, they can be held personally liable.
Administering an insolvent estate
There are several options available when administering an insolvent estate. The course of action taken will depend partly on whether a bankruptcy order has been made against the deceased person before their death.
If a bankruptcy order has already been made then the bankruptcy process will usually carry on on as normal, although there may be some adjustments.
If there is no bankruptcy order, or a bankruptcy order has been applied for but not yet determined by the court, then the estate should be administered according to the DPO 1986.
If this is the case, the personal representative should apply for an insolvency administration order.
What is an insolvency administration order?
In effect, an insolvency administration order essentially declares the deceased person bankrupt.
In addition to the personal representative, an insolvency administration order can be sought by a creditor, a liquidator, a temporary administrator or the supervisor of an individual voluntary arrangement that the deceased person was subject to.
Once an insolvency administration order has been issued, a trustee will be appointed to handle the estate. The creditors will then be repaid using funds from the estate in the following order of priority:
- Secured creditors (e.g. mortgage loans)
- Funeral expenses
- Testamentary expenses (expenses incurred by the personal representative in administering the estate, e.g. legal fees)
- Preferential creditors
- Unsecured creditors (e.g. utility bills)
- Interest due on unsecured loans
- Deferred debts (e.g. loans from family members)
All the debts in each category must be paid off before any debts in the next category can be paid.
For example, all debts to secured creditors must be repaid in full before any funeral expenses can be paid off, and so on. Any debts remaining after all the funds have been used will have to be written off.
What should I do if I’m dealing with an insolvent estate?
If you’re the personal representative for an insolvent estate, we recommend seeking professional advice due to the complexity of the procedure and the personal financial risk involved.
We have years of experience in helping people in your situation, and can offer guidance and support throughout the process. Get in touch with us today for a free, no obligation consultation.