An Insolvent Deceased Estate is when someone has died and there isn’t enough money in their estate to pay off their debts. There are particular rules around administering an insolvent estate, and if these aren’t followed correctly, or mistakes are made, the risk of the Personal Representative being held personally liable are high. It is therefore important to take professional advice and consider instructing a licensed insolvency practitioner to manage this responsibility.

An application for probate does not need to be made (although it does not matter if it has already been made or granted). The relevant court application must be made under the relevant legislation, being The Administration of Insolvent Estates of Deceased Persons Order 1986, which is applied alongside the Insolvency Act 1986 and the Insolvency (England and Wales) Rules 2016.

We have professionals who are qualified in both insolvency and non-contentious probate, so we are in a very rare position to be able to offer you specific advice that covers both of these complicated areas.

When someone dies, their debts will need to be dealt with. In England and Wales this will be the responsibility of the Personal Representative.

The process of administering a deceased person’s debt depends on the way it was held. For example, if the debt was held in joint names with someone who is still alive, the likelihood is that the other person remains liable for that debt, and it may be that the estate has to pay a proportion of the debt. If the debt was held in the deceased’s sole name, it will need to be repaid directly from the estate funds.

If there are not enough funds in the estate to pay the deceased’s debts, it is very rare for any family members to become liable for the debts. This would usually only occur if the debts were joint debts or if the debts were guaranteed by the family member.

Once the Personal Representative has a Grant of Probate from the Probate Registry, they will be able to access the deceased person’s bank accounts, sell their property and realise any other investments and other assets to enable them to repay the deceased person’s debts.

There must be enough funds in the estate to repay the deceased’s debts. To check this is the case, the Personal Representative will need to calculate the total value of the deceased person’s estate (meaning everything they owned), and the total value of the debts owed. This can range from utility bills, council tax and credit card bills to outstanding mortgages and loans. If the deceased was a sole trader or a member of a partnership (that was not a limited liability partnership) then the estate must also be ale to repay the business debts of the deceased.

If the total value of the estate is greater than the total value of the debts, it is known as being solvent. This means there are sufficient funds available, so the Personal Representative can continue to administer the estate and liquidate (sell) the estate assets, pay the debts and distribute the remaining assets to the beneficiaries.

If the value of the estate assets is not sufficient to pay the debts owed by the deceased, then the estate is insolvent. This will create great difficulties for the Personal Representative, as the estate must be administered in the interests of the creditors, not the beneficiaries (as by definition, the beneficiaries will not be receiving anything from the estate if the debts are not first repaid). This makes the process very different, and if any mistakes are made then there is a high risk that the Personal Representative could be held personally liable. The Personal Representatives should not make any further payments or distributions to creditors or beneficiaries (including their own fees if they are acting as a professional executor) if they believe the estate to be (or will be) insolvent.

This means that the Personal Representatives are in effect prevented from moving the estate forward. It is in this situation that the estate needs to be deal with under the insolvency legislation, rather than the laws of estates.

When administering an insolvent estate, it’s always best to take professional advice, especially due to the personal financial risks involved.  We have the technical knowledge in insolvency and estates laws to be able to support you..

There are various options available, with one of the most common is called an Insolvent Administration Order. This effectively declares the deceased person bankrupt. An Insolvent Administration Order can be used if the deceased wasn’t known to have an insolvent estate until after their death. If any creditors issued a bankruptcy petition against the deceased before they died, the position will be different, and the matter will have to be dealt with under the normal insolvency legislation (the Insolvency Act 1986).

A Personal Representative or one of the creditors of the estate can apply for an Insolvent Administration Order. Once the Court has made the Order, a Trustee will be appointed to control the Estate. The Trustee will then take control of the estate, including any funds held by the Personal Representatives and will collect in any assets still to be dealt with.

The Trustee will then pay the funds from the estate according to the statutory order of priority, which is:

1. Secured creditors – such as mortgage loans secured over specific assets
2. Funeral expenses
3. Testamentary expenses – expenses the Personal Representative incurs as a result of administering the Estate such as HMCTS and Court fees and legal and professional fees
4. Preferential creditors
5. Secondary preferential creditors
6. Unsecured creditors
7. Interest
8. Deferred debts – such as loans between family members

Only after the above liabilities have been properly discharged is the Trustee able to then consider distributing any remaining assets under either the will or the rules of intestacy.

It is important to note that only a Trustee (a licensed insolvency practitioner) is able to distribute funds in an insolvent estate without personal liability. If the Personal Representatives do so, it is likely that they will become liable for any payments if they do it wrong or fail to pay people who should have benefitted.