Insolvent Estates

Insolvent Estates – Personal Representatives

If there are insufficient assets to pay the debts and liabilities, the estate is insolvent.

The Personal Representatives have a legal obligation to deal with the debts of the estate. If the estate is not administered correctly then the Personal Representatives can be held personally liable. Different rules as to the payment of debts apply depending upon whether it is a solvent or insolvent estate.

Insolvent estates can be difficult to deal with. An insolvent estate needs to be administered in accordance with the Administration of Insolvent Estates of Deceased Persons Order 1999.

There is a procedure for dealing with insolvent estates and legal advice is highly recommended, as the process can be complicated.

The Order in Which Debts Should Be Paid

It is important for the Personal Representative to be aware that in the case of an insolvent estate, the creditors are entitled to be paid in a strict order of priority:

1. SECURED CREDITORS > Given Preference to other creditors
2. FUNERAL/TESTAMENTARY EXPENSES
3. SPECIAL PREFERENCE DEBTS > Friendly Societies
4. PREFERENTIAL DEBTS > PENSION ARREARS (State/Private) & Money Owed to Employees
5. ORDINARY DEBTS
6. INTEREST ON DEBTS
7. DEFERRED DEBTS > Loans from Deceased Spouse

Joint Property

If there is JOINT PROPERTY and there is an Insolvency Administration Order then Joint Property is taken into account.

Unsecured Debts

For unsecured debts, payment should be made on a pro rata basis in proportion to the net assets and the value of each individual debt paid from the insolvent estate. This order of payment cannot be varied by the Personal Representative, or under the terms of the Will or intestacy rules.

Personal Representative’s Liability

If the Personal Representatives do not follow the statutory order under the insolvent estate, they will incur personal liability for “superior” debts that have been left unpaid. Therefore, if there is any possibility that there is an insolvent estate, the personal representatives should seek legal advice to ensure that they observe the statutory order strictly when paying debts.

In practice therefore, if the total assets are worth £10,000 and the funeral and testamentary expenses amount to £2,000 leaving a net estate of £8,000 and there are other unsecured debts totalling £16,000, then the creditors will receive 50% of their outstanding debt.

Who Pays The Legal Fees?

Please note that if there are assets in the estate these can be used to pay the legal costs involved in administering the insolvent estate. Therefore, if you feel that you might need to deal with an insolvent estate then so long as there are enough assets to cover the funeral account and the legal costs then you will not personally have to pay any of the legal costs involved for sorting out and administering the insolvent estate.

We at Seatons specialise in dealing with insolvent estate work and quite often we can deal with the estate without there being any cost to you or the Personal Representative at all.