Executor of an insolvent estate?
“I’m worried that an estate that I’m an executor of is insolvent. What should I do?”
There are a lot of misconceptions around what happens in an insolvent estate. Many people believe that a person’s debts will be ‘written off’ when they die. Unfortunately this is not normally the case. Some executors also worry that they are going to become ‘personally liable’ for the debts of the deceased.
N.B. In this blog post the term ‘Personal Representative’ is used instead of ‘Executor’ of a will or ‘Administrator’ of an estate where there is no will.
What is an insolvent estate?
An insolvent estate is when a deceased person’s debts are greater than the total value of their assets. The rules of bankruptcy apply to insolvent estates, in that groups of creditors must be paid in a specific order of priority.
When a person dies, their debts are not discharged as a matter of course. Some of the debt might be covered by an insurance policy, particularly mortgages. If the debt is held in joint names then it will be taken over by the survivor. (i.e. a joint credit card, loan or overdraft). Other debts in the sole name of the deceased have to be repaid from the estate.
Unlike normal estate administrations, in an insolvent estate the personal representative’s duty is to act in the best interests of the creditors rather than the beneficiaries named in a Will. If the estate is technically insolvent then there will be no funds left to pay the beneficiaries. If the Personal Representatives use any funds that are in the estate to pay these legacies instead of repaying the creditors then this is when the personal representative can become ‘personally liable’ to repay these funds (if they cannot be recovered from the beneficiaries).
The Personal Representatives only risk becoming personally liable if they make mistakes in the administration. If the rules are followed properly then the only assets that are used to repay the debts are those of the deceased.
Which order should debts be paid?
There is a specific order of priority for types of creditors from an estate.
- Bankruptcy expenses followed by funeral, testamentary and administration expenses
- Preferential debts (e.g. VAT arrears in the six months before death)
- Ordinary debts including secured debts (e.g. credit cards, loans, mortgages)
- Interest on debts
- Deferred debts (e.g. loans from a deceased’s spouse)
Personal Representatives may be held personally liable if they repay an inferior debt before a superior debt in the order of priority. They may also incur personal liability if they repay one creditor in full if there are insufficient assets to repay all the creditors within that group.
Dealing with insolvent estates can be very dangerous. It is essential if you are acting as a Personal Representative that you get it right. If you don’t, then you could end up becoming personally liable for any errors that you make.
I don’t want to be responsible for administering the Estate. What can I do?
There are a number of options open to the Personal Representatives. If they are named as Executors in the will then they can simply renounce their position. However, they must not have begun the process of administering the estate before choosing this option. Arranging the funeral and taking care of any children or pets of the deceased are humanitarian acts and therefore don’t count as ‘administering the estate’. Contacting or closing bank accounts etc. does count, however.
If the executors renounce their position then the creditors of the Estate can apply to the Court to have the deceased declared bankrupt and for a ‘Trustee in Bankruptcy’ to be appointed. This route will often be the preferable option.
However, it can sometimes be useful for the Personal Representative to apply to the Court themselves for the deceased to be declared bankrupt (Insolvency Administration Order). This will depend on the circumstances of each individual matter.
What to do first?
Dealing with insolvent estates is fortunately a rare occurrence. If you are concerned that you may be in this situation then your first port of call should be to seek professional legal advice.
Wheelers Solicitors provide a full range of Probate administration services. If you have recently experienced a bereavement and would like support with the administration then please contact us on (01983) 533938 or via our website.