What should a creditor do if they are owed money by a deceased's estate?

What should a creditor do if they are owed money by a deceased estate and how long do they have to make a claim? Neil Dingley of Moore Recovery in Stoke on Trent explains.

What should a creditor do if they are owed money by a deceased's estate?

When someone dies, the solicitors or the personal representatives administering the estate are advised to place a deceased estates notice in The Gazette and a local newspaper, pursuant to Section 27 of the Trustee Act 1925. A deceased estate notice includes:

name of deceased
date of death
last address of the deceased
details of the executor/administrator

Any creditor who has a claim in the deceased estate has two months from the date of the notice to submit their claim to the solicitors or personal representatives.

Solvent estates

When a deceased estate is solvent, creditors’ claims will be paid in full.

Insolvent estates

When a deceased estate is insolvent (when a deceased’s liabilities and debts are higher in value than their assets), it should be administered in accordance with the provisions of the Administration of Insolvent Estates of Deceased Persons Order 1986 (“the Order”). In practical terms this means that the deceased estate is treated as if it were an individual bankruptcy estate – no creditors will be paid until all the assets of the estate are realised. Dividends will be paid in accordance with the standard insolvency ‘payment waterfall’, after the payment of any funeral expenses.

An insolvent deceased estate can be dealt with informally or formally:

In dealing with matters informally, the solicitors or executors agree creditors’ claims and make a proportionate dividend payment to all creditors from the assets realised in the estate. An informal approach is normally taken when creditors are few in number and/or the claims are not complex or disputed.
When a deceased insolvent estate is dealt with formally, this means that either a creditor or the personal representatives of the deceased have petitioned the Court for a trustee in bankruptcy to be appointed. The trustee will administer the estate in the same manner as a conventional bankruptcy.

In either case, pursuant to Rule 14.28 of the Insolvency (England and Wales) Rules 2016, a notice of intended dividend will be advertised in The Gazette. Creditors will be given a last date for proving, which should be no less than 21 working days from the date of the advertisement. A dividend will be paid within two months of this date. Creditors should prove their debts to the trustee in bankruptcy in order that they may receive a dividend.

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. 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:

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

Petitioning the Court

If the personal representatives are not engaging with a creditor or are not accepting what the creditor considers to be a valid claim, then, as stated above, a creditor with a debt of over £5,000 can petition the Court for an insolvency administration order to be made and for a trustee to be appointed. The process is similar to that of the presentation of a bankruptcy petition. Upon presentation of the petition the requisite deposit and costs must be paid to the Court. Currently, these are £1,500 for the petition deposit and £302 for the Court costs.

As with a conventional bankruptcy, being the petitioning creditor does not offer any special privileges on the creditor, but at the very least, the costs of petition will be paid as an expense of the bankruptcy and the fact the deceased estate is treated as a bankruptcy, any and all creditor claims will be crystallised, and any assets will be automatically caught in the bankruptcy estate.

About the author

Neil Dingley is an Insolvency Practitioner and Partner of Moore Recovery in Stoke on Trent and has a background in information technology and accountancy.