Insolvent estates

The loss of a loved one is never easy, yet the practical side of dealing with such a passing can heap on more pressure than many would imagine. A leading example of which is the administering to of an insolvent estate – which is fraught with legalities and made all the more compounding by often confusing advice. Within this guide we've cut through the jargon to help you understand the process of insolvent estates.

What is an insolvent estate?

An insolvent estate is where an estate (the total net worth of an individual’s assets versus liabilities) has more debts than it does assets. The estate is then bankrupt – owing more money than it has in property or cash.

Debt: Getting to the crux of the matter

Sole debts
You may be worried about whether or not a deceased person’s debt can be inherited; in most cases there’s little reason to think this. Where debt is in a sole name there are but two exceptions to this rule: first, where a third party guaranteed the debt and second, where the deceased had previously gifted money only a short while before the death – which is then seen as a deliberate attempt to avoid paying those who are owed money (known as the creditors of the estate).

Joint debts
Joint liabilities, such as mortgages, bank accounts, utilities and car finance agreements, where there is more than one person named, generally see the debt moved into the survivor’s sole name.

This can be a cause for concern for many, particularly when a death is unexpected. If you've found yourself in this position then you must contact the companies in question – they are obliged to be reasonable and are more often than not understanding to such a situation. What’s more it’s in their best interests to come to some arrangement – after all, a customer who continues to pay to drive down a debt is better than one who doesn't pay at all. When a person who is already bankrupt passes the trustee or official receiver will continue to administer the estate, although they’ll need to be notified of the death.

A cautionary word of advice

A cautionary word of advice An insolvent estate is subject to very strict rules about what is paid to whom and when. Above all you should l remember that no money or belongings are to be passed on, even where beneficiaries are named in the will, before you are given the go-ahead by the administrator.

Whilst we don’t want you to be worried about this process, it’s important to point out that any personal representative of the estate can be held liable if the procedure isn't followed to the letter – and to this end it’s advisable that executors seek legal advice as to whether or not they renounce their role.

Order of debts

The following order is how debts should be paid from an insolvent estate:
  • Secured creditors;
  • Funeral expenses;
  • Testamentary expenses;
  • Preferred debts and preferential debts;
  • Unsecured creditors;
  • Interest due on unsecured loans;
  • Deferred debts.
  • Sources of support and guidance

    As a first step towards dealing with an insolvent estate you may wish to seek professional legal advice from the deceased’s solicitors. Beyond this however there are a number of further bodies and organisations who may be able to help, including:

    Gov.Uk: Insolvency Service Information

    HMRC: Deceased Insolvent Estates Information

    Bereavement Advice Centre: Insolvent Estate Guidance