Though the concept of insolvency is typically associated with struggling businesses and bankrupt individuals, the problems posed when assets cannot cover debts and liabilities may also occur when an estate is being administered. Called insolvent estates, these matters can be complex and must be dealt with per The Administration of Insolvent Estates of Deceased Persons Order 1986. Personal representatives should therefore ensure that they are fully aware of the rules that apply to insolvent estates before taking any further action to administer the estate of the deceased.
What Is An Insolvent Estate?
In simple terms, an insolvent estate has debts that exceed its assets. This will mean that all outstanding liabilities cannot be settled when the estate is administered, potentially causing problems for the personal representative and possible beneficiaries.
When dealing with an insolvent estate, personal representatives have to take great care to ensure that the estate is administered first to the benefit of creditors. If beneficiaries are paid first from an insolvent estate, creditors may hold the personal representative personally liable for the amount they are owed.
Do note that the personal representative will not typically be personally liable for the deceased’s debt providing the correct procedure is followed and that said debts were incurred in the name of the deceased only. If the debt is a joint liability then the survivor will be liable for payment of the debt and should contact the creditor (such as the bank or building society) to make them aware and come up with a suitable course of action.
How To Deal With An Insolvent Estate
As we have outlined above, it is crucial that personal representatives follow the correct procedure should they be required to administer an insolvent estate. Should you be concerned about the possibility of an insolvent estate it is best not to act until you have sought professional legal advice to make a final decision on whether you wish to administer the estate or relinquish this role.
If a personal representative continues in their role having sought thorough advice on the risks of administering an insolvent estate, they must make any payments for liabilities based on the order of creditors outlined in the Insolvency Act 1986. Failure to follow this order is what may land an individual in hot water concerning liability for the deceased’s debts.
The Order Of Creditors
Whereas a solvent estate will be administered with beneficiaries interests put first, an insolvent estate must be administered with creditors interests put first. As laid out in the Insolvency Act 1986, this order of priority for insolvent estates is:
- Secured creditors
- Funeral and testamentary expenses that are reasonable to the size of the estate
- Preferential creditors
- Unsecured creditors
- Interest due on secured loans
- Deferred debts
All debts in a category must be settled before claims of the next category can be considered. In some cases, there may be insufficient funds to clear the debts of the entire category and therefore remaining funds should be paid proportionately to the money owed. Should there be funds remaining when all creditors have been paid as per the hierarchy, the personal representative can distribute these as per the Will or intestacy rules.
When To Get Help
With such important rules to follow when administering an insolvent estate, it is essential that any parties involved seek professional advice as soon as they have questions or feel concerned. Advice from a legal professional or licensed insolvency practitioner will ensure that you fully understand your rights and responsibilities and can act accordingly with regard to an insolvent estate.
As a licensed insolvency practice, Ballard Business Recovery can assist with matters related to insolvent estates. Get in touch with our team of chartered accountants today to discuss your position and get transparent guidance on your next steps.
