All estates involve some form of debt, such as funeral expenses, utility bills, benefit overpayments, mortgages, or credit cards. In most cases, these are paid from estate assets after accounts have been closed, or property and investments sold. Sometimes, the debts of total more than the assets, or the assets do not cover all of the debts. These are known as insolvent estates.
How can I find out if an estate is insolvent?
You should contact all organisations where the deceased held accounts or debts to determine the total account values. You may find it helpful to prepare a calculation of these figures. This will help you to determine how much is left in the estate after all debts have been paid.
If the deceased was already declared bankrupt, you must inform the Official Receiver or the Trustee in bankruptcy. They will be able to take over the administration of the estate.
What can I do to protect myself as Executor?
You should firstly seek advice from a Solicitor as to whether you should continue to act as personal representative. If you continue acting, you can take steps to avoid personal liability for any unpaid debts of the estate:
- Do not pay any debts or beneficiaries until you are certain that you have established all assets and debts. You should also check that you pay any debts in the correct order.
- Keep a detailed record of all interactions with asset holders and creditors in case anyone challenges you later on.
- Make sure that you follow the order of priority when paying any debts.
- If there are insufficient assets to pay all creditors in one category, you must pay each one in equal proportion. This will avoid you being faced with a challenge by a disappointed creditor.
When should I pay the debts?
You should only pay the debts once you are confident that you have established the value of the estate and the amount of all assets and debts. There is a strict order which you must follow when paying debts. This is set out in the Insolvency Act 1986:
- Secured creditors (e.g. mortgages or loans secured against property or other assets)
- Bankruptcy expenses (if any), funeral expenses, testamentary and administration expenses (the costs and expenses incurred in administering the estate)
- Preferential debts (such as arrears of wages to employees or contributions to workplace pension schemes)
- Ordinary debts (such as credit cards, overdrafts, unsecured personal loans, unpaid invoices for goods or services)
- Interest payments due on any unsecured loans
- Deferred debts (such as an informal loan between family members)
If the estate cannot meet all the debts in one particular category, you should not pay debts in any lower category. If the estate can only cover some debts in a specific category, pay each creditor in proportion to their owed amount.
Where can I get help to administer an insolvent estate?
Before taking steps to administer an estate, you should consider whether it is appropriate for you to act.
A list of Solicitors who may be able to assist with advising you on what your options are is available by using the Law Society Find a Solicitor service.