What is a deceased insolvent estate?

What is a deceased insolvent estate?

A deceased estate is insolvent when the deceased person’s liabilities exceed the value of their assets. This leads to creditors being owed money by the estate, which must be repaid as far as funds allow.

A hierarchy of payment exists for deceased insolvent estates. The executor, or personal representative, is responsible for ensuring debts are paid in accordance with insolvency laws.

This is a serious responsibility with regards to any deceased estate but, when the estate is insolvent, the personal representative can become personally liable if they distribute payments incorrectly.

Insolvency Administration Order

When a person dies and their debts are higher than the value of their assets, the debts must be repaid where possible. They aren’t automatically written off, but become part of a deceased insolvent estate.

If a bankruptcy order has already been made prior to death, the bankruptcy process continues as it would have done normally. If not, the Administration of Insolvent Estates of Deceased Persons Order, 1986, takes effect, and the personal representative can apply to the court for an insolvency administration order.

Protection for assets in a deceased insolvent estate

Creditors of the insolvent estate can also make an application if they can show why they suspect the estate is insolvent. If the court believes that assets are at risk of being sold or otherwise disposed of, an interim receiver may also be appointed as a safeguard.

Essentially, the insolvency administration order confirms the deceased person was bankrupt. It effectively provides the starting point for a trustee to be appointed to deal with the debts, and repay creditors in the prescribed order.

So what is the order of payment in these cases?

Payment hierarchy from a deceased insolvent estate

The order of repayment is as follows:

  • Secured creditors – mortgage lenders/loans secured on an asset
  • Funeral expenses
  • Testamentary expenses – costs incurred by the person administering the estate
  • Preferential creditors
  • Unsecured creditors, including credit card and store card providers, utility companies, and unsecured bank loans
  • Interest due on unsecured loans
  • Deferred debts – loans to family members, for example

Each category of creditor must be repaid as a whole before moving on to the next category. Unfortunately, this often leaves unsecured creditors with little or no return from an estate. Liability for debts in joint names passes to the joint party, and any debts covered by life insurance may be repaid with little complexity.

The debts that remain need to be dealt with very carefully, however, which is why it’s highly advisable for an executor or personal representative to seek specialist legal advice before carrying out any of their duties.

Complexities of deceased insolvent estates

If a personal representative is unaware the estate is insolvent, and of the rules that apply in these cases, it can lead to significant problems. Deceased insolvent estates are complex to deal with and a high degree of risk exists for personal representatives, both prior and during the administration.

An executor may distribute funds to the beneficiaries according to the instructions left in the Will, for example, but if creditors make a claim on the estate they can be held liable for these sums.

Caution is the watchword when dealing with deceased estates in general, but especially so when a deceased estate is insolvent. It’s imperative to follow the stringent insolvency laws that exist in the UK, to avoid the unwitting misdistribution of funds.

Keith Tully, Licensed Insolvency Practitioner

Keith Tully is a Partner at Real Business Rescue, part of Begbies Traynor Group plc. and has 30 years’ experience advising directors across a range of company distress issues. Keith recently set up a dedicated Covid-19 Support group for business owners across the North West, where he is based.