Occasionally, people die and the assets that make up their estate are not worth enough to pay off their debts. Welcome to the world of insolvent estates.
Insolvent estates in England and Wales have specific administrative rules and the personal representative can carry the can if those rules aren’t correctly followed or mistakes are made.
If the debt was held in joint names, it will transfer to the surviving spouse upon death. But if the debt was in the ‘sole name’ of the deceased, it will need to be paid out of the proceeds of the estate.
The personal representative will assume responsibility for handling that specific task once they have obtained a grant of probate, along with calculating the total value of the estate and any outstanding debts.
Obviously, that means the grant of probate gives them access to the deceased’s assets, such as their bank accounts and any property, investments or insurance policies held in the deceased’s name.
The difference between a solvent and an insolvent estate
Put simply, a solvent estate is where there’s enough money to pay off the deceased’s debts. An insolvent estate is the complete opposite, where there isn’t enough money in the estate to pay the debts.
Solvent estates can be fairly straightforward as there are enough funds to administer the estate and pay off any debts, before distributing the proceeds of what remains to any beneficiaries.
By contrast, insolvent estates can prove tricky for the personal representative as the deceased’s estate should be administered in the creditors’ interest.
How to deal with an insolvent estate
If you find yourself as a personal representative dealing with an insolvent estate, your first port of call should be to seek professional advice due to the potential liabilities involved.
Our probate service is a good place to start. You should also consider seeking legal advice as well.
You or the creditors can apply for an insolvency administration order (IAO), which essentially declares the deceased bankrupt. An IAO can also be used if the deceased didn’t know they had an insolvent estate.
Once the IAO is obtained, the debts will be repaid in legal order of priority. All debts to creditors must be settled first and when the cash runs out, the remaining debts are written off.
The legal priority in which debts must be paid from an estate which is:
- secured creditors (mortgages, loans etc)
- funeral expenses
- testamentary expenses (costs for administering the estate)
- preferred and preferential debts
- unsecured creditors (credit cards, utility bills etc)
- interest owed on outstanding loans
- deferred debts (family loans).
Don’t be afraid to ask for help
Insolvent estates can get very stressful, very quickly. If you’re in this position, don’t be afraid to ask us for help. We’ve helped clients in this situation before and are happy to offer our experience to you.
Get in touch today to get started.