What if an Estate has insufficient assets?

What happens if a deceased person’s estate has more debts than assets?

Executors often aren’t aware of the full extent of the estate they are appointed to administer. Most beneficiaries expect to inherit in some way, but unlike assets you can’t usually inherit debt that was in someone’s sole name, and it doesn’t die with them.

So what happens if you pull together all the information on the estate to find that the liabilities exceed the values of its assets?

What is an insolvent estate?

This is an insolvent estate and executors should take advice as soon as possible on the next steps, particularly as they can be personally liable if they don’t take the right action. 

How can an insolvent estate be administered?

The insolvent estate can be administered in one of three ways:

1. By the executor.
2. Under an administration order from the court, which will direct the executor in how to administer the estate.
3. Under an Insolvency Administration Order (“IAO”). The executor or creditors would need to petition to court for the IAO and this would then be administered in a similar way to bankruptcy with the appointment of an Insolvency Practitioner.

In what order must debts be paid?

The ‘Administration of Insolvent Estates of Deceased Persons Order 1986’ lists an order of priority in which the debts must be settled. This is listed below and legally they must be paid in this order, clearing one category before moving on to the next.

If there is not enough funds to clear a category then the available funds should be paid proportionally to all creditors in that category.

1. Secured creditors – for example, a mortgage on a property or finance over a vehicle
2. Funeral expenses – these need to be reasonable in respect of the size of the estate. Care should also be taken where the executor or family members pay for a funeral from their own funds expecting to be able to be repaid by the estate.
3. Administration expenses – this can include postage, petrol, probate fees. It’s strongly advised to keep a clear record of these, including receipts.
4. Preferential debts – wages, holiday pay and pension contributions due to employees, such as carers where the deceased received funding to directly employ them and taxes collected on behalf of HMRC such as VAT and employee’s NICs and income tax.
5. Unsecured creditors – for example, utility bills, bank loans, credit cards.
6. Interest due on preferential and unsecured creditors
7. Deferred debts – for example, an informal loan between family members

Can beneficiaries receive anything from an insolvent estate?

It is important to remember that, even if a Will sets out specific legacies, no assets can be given to a beneficiary if there are outstanding liabilities.

Executors are strongly advised to receive written confirmation that any debts are repaid or written off before any distributions can be made to beneficiaries. If assets have been distributed without settling all of the estate’s debts, the executor could be personally liable.

There can be further complications if there have been large gifts out of the estate in the 7 years before death as this can be seen as a bid to avoid repaying debt. In some cases, these may need to be repaid.

What is a Section 27 Notice and why is it important?

There may be debt the executor is not even aware of, which is why we recommend that executors place a Section 27 Notice in the gazette and local paper, which is an advert to announce the death of an individual.

It also informs potential creditors that the estate is going to be distributed and they have 2 months to make a claim for any outstanding debt.

Once the 2 months have passed, the executor can distribute the estate and is protected from personal liability for any unpaid debt (provided it can be shown that they weren’t aware of the debts). The creditor is still entitled to seek repayment, but this would then be from the beneficiaries.

Please note the above applies to deaths in England & Wales.

Speak to Bishop Fleming

If you have concerns about whether an estate may be insolvent, or you are acting as an executor and are unsure of your responsibilities, early advice is crucial. Bishop Fleming’s probate and restructuring teams can provide clear, practical guidance to help you navigate insolvent estates, reduce risk and ensure the estate is administered correctly.