What is an insolvent estate?

An insolvent estate is left when a deceased person’s debts are greater than the total value of assets, and therefore money is owed to their creditors. The rules of bankruptcy apply to insolvent estates, in that groups of creditors must be paid in a specific order of priority.

If the executor or administrator dealing with the estate distributes funds incorrectly, or without realising that specific rules apply to insolvent estates, they may become personally liable for all misdirected monies.

Bankruptcy rules on death

When a person dies, their debts are not discharged as a matter of course. Some of the debt might be covered by an insurance policy, in the case of a mortgage for example, or taken over by their partner if the debt is held in joint names, but other debts in the sole name of the deceased have to be repaid from the estate.

If a bankruptcy order has been made against the person prior to their death, apart from certain amendments being applied, the bankruptcy process continues as normal. Otherwise, rules laid down in the Administration of Insolvent Estates of Deceased Persons Order, 1986, come into play.

Insolvency administration order

An insolvency administration order is required from the court before the estate can be dealt with. It is generally applied for by the deceased’s personal representative – their executor as named in the will, or if they died intestate, the appointed estate administrator.

Creditors can also apply for an insolvency administration order, but they must demonstrate that it is “reasonably probable” that the estate is in fact insolvent. In some instances it is thought necessary to appoint an interim receiver to protect the assets of the estate until the petition is heard by the courts.

Inheriting personal debt

The debts of an individual are not usually inherited by their family if they are in the sole name of the deceased, but there are two main exceptions to this:

• A third party guarantee on one of the deceased’s loans would make that third party liable for the total remaining debt
• Money that has been ‘gifted’ by the deceased up to seven years prior to their death could be viewed as an attempt to avoid paying creditors

As far as jointly owned property is concerned, responsibility for mortgage repayments and joint utility accounts revert to the joint owner who must take on the full payment amounts. In this respect, a charge may be placed against property held in joint names.

Hierarchy of payment from an insolvent estate

This is the order of priority for paying creditors from an insolvent estate:

• Secured creditors
• Funeral expenses
• Testamentary expenses
• Preferential creditors
• Unsecured creditors
• Interest due on unsecured loans
• Deferred debts, for example between members of the family

Begbies Traynor can provide further advice on dealing with insolvent estates. The rules are complex, and the possibility of personal liability is high if a mistake is made.