How Do I Deal with a Deceased Insolvent Estate?
When somebody dies, their unresolved debts are paid for with their estate. Sometimes, however, a person’s debts are greater than the value of their estate – this is known as a deceased insolvent estate.
If you’re the personal representative of an estate, it’s your responsibility to make sure that the matters of their estate are settled properly. In the case of insolvent estates, this means it’s your duty to settle matters with the deceased’s creditors – if you don’t, you could become personally liable for their debts.
In this guide, we’ll explain how you can safely administer a deceased estate, how different debts are handled after death, and what you can do if you’re struggling financially.
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Will I Inherit the Debts of a Deceased Insolvent Estate?
Despite what some may think, a person does not pass on their debts when they die. This means that – generally – most people shouldn’t have to worry about inheriting any financial burdens from the deceased.
However, the personal representative of the deceased estate is at some risk.
Personal representatives – such as executors or administrators – have a duty to administer the deceased’s assets properly. When the deceased is insolvent, this means they have a duty to make sure assets are properly distributed to creditors to help pay the debt.
People without awareness of the rules, assuming the deceased’s debts have been written off, sometimes distribute the individual’s assets to friends and family as normal. Unfortunately, doing so can result in the personal representative becoming personally liable for the deceased’s debts.
How Do I Safely Handle a Deceased Insolvent Estate?
If you’re the personal representative of a deceased insolvent estate, it’s best to seek the advice of a will and probate solicitor. They’ll ensure you’re acting in compliance with all of your duties, allowing you to avoid becoming personally responsible for any debts.
Once all creditors are accounted for, you’ll need to issue an Insolvency Administration Order. This is essentially a slightly modified version of a bankruptcy order. All assets in the estates are surrendered for the repayment of creditors and then most remaining debts are written off.
Creditors are repaid in the following order:
- Secured creditors
- Testamentary expenses (your costs)
- Preferential creditors
- Unsecured creditors
- Interest due on secured creditors
- Deferred debt (loans to family, etc)
Unfortunately, the hierarchy of repayment does mean that the deceased’s relations are unlikely to receive any money. However, the costs you’ve incurred by acting as the personal representative should be covered. You also won’t have to worry about paying for the deceased’s debts.
Understanding How Different Debts Are Handled After Death
Generally speaking, most debts are written off once the estate has been settled. However, different debts are handled differently in the event of a person’s death. In some cases, this does result in debt obligations being carried over to someone else.
Individual Debt
Individual debts are taken out in the name of one individual only. This means that nobody else can be pursued for them (unless they have signed a personal guarantee).
When a person passes away, their individual debts must be resolved through their estate. Any amount left outstanding after the distribution of the deceased’s estate will be written off.
Joint Debts
Joint debts are owned in full by all their signatories. This means that if one person dies, the debt passes in full to the surviving party.
Depending on the debt, this can cause considerable financial difficulty for the surviving party. You can use the proceeds from an insurance policy to cover the debt or you can try and renegotiate the payment terms with your creditors.
Secured Debts
Secured debts are guaranteed against an asset, typically property. This can have different effects depending on the type of arrangement.
In cases of joint tenancy – where each person owns all of the property – the deceased’s share of the property passes to the surviving party and does not form part of their estate. This means the property will be protected from creditors.
If you and the deceased were tenants in common – meaning you both own a certain individual share in the property – the deceased’s share will go on to form part of their estate. This means their half of the property may go up for sale to repay creditors.
Unsecured Debts
Unsecured debts are not guaranteed against anything. This means they must be settled with funds available in the estate. These are often left unpaid as they are low in the repayment prioritisation.
Generally speaking, the unsecured debts of a deceased individual will be written off unless their relations have signed off as guarantors.
What Can I Do if I’m Struggling Financially After a Death?
The death of a loved one can sometimes have an unfortunate impact on our financial stability.
You may be left struggling to repay the debts of the deceased or you could be struggling with the reduction in your household income.
If this is the case, you should seek the guidance of an insolvency practitioner as soon as possible. Early action keeps your options open and prevents your debt problems spiralling out of control.
Get in touch to book a free consultation today.
