When a person dies in a state of insolvency they may leave behind an insolvent estate.
This means their liabilities are greater than any assets and therefore, despite their death, creditors are still owed money.
In this article we’ll explore the rules around insolvent estates and what it may mean for you.
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.
Despite popular misconception, death does not mean someone’s debts disappear. Rather, the situation continues as with a normal bankruptcy, with some points of difference.
If the deceased individual was already subject to a bankruptcy order at the time of death, the normal process of bankruptcy simply continues.
Where this is not the case, things proceed as per the rules laid out in the Administration of Insolvent Estates of Deceased Persons Order, 1986.
What is an Insolvency Administration Order?
In order to manage the insolvent estate, the personal representative will need to apply for what is called an ‘Insolvency Administration Order.’
This is a legal mandate from the court which appoints a trustee to pay creditors.
In fact, creditors themselves can apply for this, if they can demonstrate to the court that its ‘reasonably probable’ the estate is insolvent.
In What Order are Creditors Paid From an Insolvent Estate?
It may be that not all creditors can be paid from an insolvent estate. With what money is available the following hierarchy of payment must be adhered to:
- Secured creditors come first (commonly something like a mortage)
- Funeral expenses follow
- Testamentary expenses (which might be expenses the Personal Representative incurs during the process)
- Preferential creditors
- Unsecured creditors (this includes utility bills)
- Interest due on unsecured loans
- Deferred debts
Is Personal Debt Inherited by Family Members After Death?
Debt is not inherited unless one of the following conditions applies:
- A family member had offered a 3rd part guarantee on a loan taken out by the deceased
- Where money had been given as a gift to a family member during the 7 years prior to death in a manner which suggested an attempt to avoid paying creditors