What is an insolvent estate? Katie Mayren, a solicitor in the Wills and Probate department at Stephensons, explains what happens when a deceased’s estate is insolvent and what the order of payment for liabilities is.

What is an insolvent estate?

When someone dies and the liabilities (or debts) are higher in value than their assets, their estate is classified as an insolvent estate. If the estate has more assets than liabilities, but not enough residuary estate to satisfy the legacies (amounts of money or property left to someone) in a will, then the estate is not classed as legally insolvent. In these circumstances, the available funds are apportioned in a certain way for part payment of each legacy.

It is important to remember that provided the liabilities of a deceased person are in the sole name of the deceased, they are payable by the estate and the estate only. If a liability is in joint names, it is likely that the debt will still be owed by the survivor. In such circumstances, the lender should be contacted for further guidance.

What happens when a deceased’s estate is insolvent?

If there are not enough assets to settle the liabilities, then there is an order of priority that applies to each creditor (persons owed money by the deceased). The estate is required to be administered under the provisions of The Administration of Insolvent Estates of Deceased Persons Order 1986. The order of payment for each creditor can be established by obtaining an insolvency administration order if required.

If an estate is insolvent, then the personal representative, or PR (the person(s) responsible for managing the deceased’s estate), should administer the estate for the benefit of the creditors as opposed to the benefit of the beneficiaries (the persons who will inherit), either under the will or the intestacy rules.

A PR may wish to take care not to intermeddle in an estate if there is a possibility that the estate is insolvent from early on. They may wish to take legal advice on whether it is in their best interest to renounce, rather than fulfil, their role as executor or administrator and administer the estate. Once a PR is deemed to have intermeddled, they may be required to fulfil their role as executor or administrator and administer the entire estate.

Should a PR decide to renounce in their role, one of the creditors may wish to take out the grant, as it will likely be in their interest to do so to ensure they get paid or at least partially paid under the order of priority. Failing this, a trustee in bankruptcy may be appointed to administer an insolvent estate. This is likely if the deceased had already been declared bankrupt prior to death.

There are risks involved in administering an insolvent estate and extreme care should be taken to record the value of any assets.

What is the order of priority when paying creditors from an insolvent estate?

The order for payment of any liabilities in an insolvent estate is set out in the Insolvency Act 1986 and failure to adhere to that order can result in a PR being personally liable for costs.

The order of payment for liabilities is set out as follows:

1. secured creditors (provided the asset is available in which the debt is secured against)
2. funeral, testamentary and administration expenses
3. preferred debts and Preferential debts
4. unsecured creditors
5. interest due on secured loans
6. deferred debts

All liabilities in a category must be settled before moving down to the next category and if there are insufficient funds to settle one category they will need to be apportioned to each creditor within that category.

Summary

Points to consider to reduce risks of personal liability:

• If an estate is at risk of being insolvent and this is apparent early on, then a PR should take care when arranging the funeral and only incur expenses that are necessary to avoid any risk of personal liability.
• Obtain professional valuations for any assets in the estate and document them.
• Do not provide any beneficiaries with any belongings that could be of any monetary value.
• Do not settle any liabilities early until it is established that they are entitled to be paid in full and there are enough assets to do so.
• Contact creditors and explain that the estate is insolvent to see if they are willing to write off that particular liability.
• Before distribution to any beneficiaries, if possible, ensure that all creditors have confirmed in writing that their file is closed and that the debt has either been satisfied, partially satisfied, or written off entirely.

If you have any doubts as to whether to act in a suspected insolvent estate, you should seek legal advice at the earliest opportunity.

About the author

Katie Mayren is a solicitor in the Wills and Probate department at Stephensons

See also

Place a deceased estates notice

The duties of an executor: what to do when someone dies

Find out more

The Administration of Insolvent Estates of Deceased Persons Order 1986 (Legislation)

Insolvency Act 1986 (Legislation)

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Publication date: 21 November 2022

Any opinion expressed in this article is that of the author and the author alone, and does not necessarily represent that of The Gazette.