When a person in debt passes away, their debt remains, so once the estate value has been accurately calculated, before it can pass on to beneficiaries, the money in the estate must first be used to pay off the estate’s creditors. In the case of an insolvent estate, in addition to money, items of value should also be sold to contribute to liabilities due to creditors, with beneficiaries receiving nothing.
Who is Responsible for Administering an Insolvent Estate?
When an individual dies, a personal representative is appointed to settle the affairs of the deceased. In many cases, this personal representative is chosen as executor in the will by the deceased party, however, when there is no will, an executor is not appointed in the will, or an executor refuses or is unable to act on behalf of the deceased, an administrator will be appointed.
Once a personal representative is chosen or an administrator appointed under an administration or insolvency administration order, the correct procedures must then be followed. In contrast with solvent estates where the estate is split for the benefit of chosen beneficiaries, an insolvent estate must be administered to the benefit of those creditors owed by the estate. The same rules apply to insolvent states as to bankruptcy cases, so if the correct administration procedures are not followed, the party tasked with administering the estate is held personally liable for the debts of the deceased.
Debt Priorities
Whether the person responsible for an insolvent estate is a personal representative chosen by the deceased or an appointed administrator, debts must always be paid off in the same order - creditors are always the priority.
The exact order of debt priorities for an insolvent estate are as follows:
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Secured creditors - banks and asset-based lenders
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Funeral expenses - funeral directors and burial
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Testamentary and administration expenses - costs owed to administrators and legal representatives
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Preferential creditors - creditors with priority over unsecured creditors
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Unsecured creditors - individuals or institutions that lent money without obtaining collateral from the deceased
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Interest due - Interest due on unsecured loans
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Deferred debts
To ensure that administrators are not liable for debts owed, it’s vital that all debts in each of the above categories are paid in full before the next category of creditor can be paid. In the event that there are not enough assets to meet the debt owed in a category, the assets are then split among the creditors, in proportion with the amount owed to each creditor.
Insolvency Advice
If you have been chosen as the personal representative of an insolvent estate, it’s important to seek advice from licensed insolvency practitioners to ensure that the right procedures are observed and you are protected from liability for debts owed to creditors.
For help in administering an insolvent estate, contact BEACON. Call 02380 651 441 to arrange a free initial consultation.