An Insolvent Estate is when someone dies and there isn’t enough money in their Estate to pay off their debts. There are particular rules around administering an insolvent Estate, and if these aren’t followed correctly, or mistakes are made, the Personal Representative could be held personally liable.
Paying Off Debts after Death
When someone dies their debts will need to be dealt with. In England and Wales this will be the responsibility of the Personal Representative.
The process of administering a deceased person’s debt depends on the way it was held. For example, if the debt was held in joint names with someone who is still alive, the debt can be transferred into that person’s name. But if the debt was held in the deceased’s sole name, it will need to be paid off using an insurance policy (if there is one) or paid directly from the Estate funds.
Once the Personal Representative has a Grant of Probate from the Probate Registry, he/she will be able to access the deceased person’s bank accounts, sell their property and gather in any other investments. Therefore the Personal Representative will be able to sell the assets in the Estate to pay off the deceased person’s debts.
For more information see Settling Estate Debts during Probate.
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.
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.
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.
Dealing with an Insolvent Estate
When administering an insolvent Estate, it’s always best to take legal advice, especially due to the personal financial risks involved.
There are various options available, with one of the most common is called an Insolvency Administration Order. This effectively declares the deceased person bankrupt. An Insolvency Administration Order can be used if the deceased wasn’t known to have an insolvent Estate until his or her death.
A Personal Representative can apply for the Insolvency Administration Order, or the creditors of the Estate can. Once the Order has been issued, a Trustee will be appointed to control the Estate. The creditors can then be paid off according to an order of priority, which is:
- Secured creditors – such as mortgage loans
- Funeral expenses
- Testamentary expenses – expenses the Personal Representative incurs as a result of administering the Estate such as Probate Registry and legal fees
- Preferential creditors
- Unsecured creditors – such as utility bills
- Interest due on unsecured loans
- Deferred debts – such as loans between family members
Therefore all the debts to the secured creditors must be paid off before the funeral expenses, and so on. Once the money runs out, the remaining debts will need to be written off.