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A guide to handling an Estate with debt, and Insolvent Estates:
When a person dies, the Executors (if they left a Will) or their Administrators (if they did not leave a Will) - known collectively as the Personal Representatives - are responsible for dealing with their Estate.
There are particular rules about the order of paying off debts and liabilities and, if these aren’t followed correctly, or if mistakes are made by the Personal Representatives, they could be held personally liable by the wronged parties. Read on to learn more.
What happens to debt after someone dies?
When somebody passes away, their financial debts do not die with them. Regardless of whether a person is in debt at the date of their death, there will be an executor specified in their will or, if the person did not have a valid Will, an administrator under the Rules of Intestacy. These roles are known collectively as Personal Representatives.
It is the role of the Personal Representatives to handle the administration and distribution of the estate, which is made up of all of the deceased person’s assets, including investments, cash in the bank, property and other possessions.
Once the estate value has been calculated, before it can be distributed among the beneficiaries, any existing debts must be repaid and deducted from the estate value. Many people believe that all outstanding debts are written off when somebody dies, but this is not the case. Whether it is an unpaid loan or utility bill, all debt must be paid out of the deceased person’s estate, before the remaining balance is paid to the beneficiaries.
How do you work out whether there is enough money to pay the debts?
As the Personal Representative of the Estate, one of their roles will be to calculate the total value of the assets that the deceased held, as well as the total value of any liabilities they had. These debts could include funeral costs, loans, credit cards and mortgages.
To get the total final value of a person’s Estate, you will need to take the value of the liabilities off the value of the assets. Our Probate Solicitors in Preston have put together some helpful examples, below.
If the deceased had assets (for example, a house and money in the bank) worth £200,000, however their liabilities (for example, their mortgage, loans and credit cards) totalled £250,000, their Estate would be insolvent.
If the deceased had assets worth £100,000, and liabilities of £1,000 (or, realistically, any amount up to £99,999.99), the Estate would likely be solvent.
Can the executor of an estate be held responsible for debts?
As previously mentioned, the most important part of acting as a Personal Representative is to ensure that the estate is administered and distributed correctly. If this is not done by the Personal Representative and they do not pay any creditors in full, where possible, out of the estate, then they could be held personally liable for the unpaid debt following distribution.
In addition, if the Personal Representative incorrectly distribute an estate, so that the intended beneficiaries do not receive their share, the Personal Representatives can also be held personally liable. Indeed, the solicitors at MG Legal have just won a legal case against an executor who had not distributed assets properly—the executor paid back the money, and our clients received the share of the deceased’s estate to which they were rightly entitled.
It is the responsibility of the Personal Representatives to ensure that all debts are repaid before beginning the process of distributing the estate among the beneficiaries.
Danger of unknown debts to executors:
Because of this possibility of personal liability, the prospect of unknown debts that cannot be easily located are a scary thought for executors. The only way to ensure as far as possible that there are no unknown or hidden debts, especially when dealing with a complicated estate, is to work with a solicitor specialising in Wills and Probate.
Our expert team of local Wills and Probate Solicitors would suggest placing Section 27 Notices under the Trustee Act 1925. Once these Notices are placed, in The Gazette and usually also a paper locally to the deceased’s home or place of work, any creditors have a minimum of 2 months to contact the Personal Representatives (or their expert solicitors) to make them aware of the debt.
Once this time period has passed, the Personal Representatives are absolved from their personal liability against creditors and unpaid debts. You can read more about Section 27 Notices, here.
Can beneficiaries be held responsible for debt?
With no legal responsibility in regard to the distribution of the deceased’s estate, unless the beneficiary is also the Personal Representative, beneficiaries in some cases have little risk of being held responsible for the debts of a lost loved one after their death from their own personal funds.
However, if the Personal Representative has placed Section 27 Notices and, after their expiry, has paid all known debts, they can usually reasonably proceed to the distribution of the estate. At this time, any creditors that later come forward, can follow the money into the hands of the beneficiaries.
Who is responsible for debt after death?
If you are reading this you could be wondering ‘is anyone responsible for a deceased person’s debt?’, and as explained by our Wills and Probate solicitors, it is up to the person in charge of the estate after death, the executor or administrator, to handle the debt and estate administration correctly.
If you do not feel comfortable undertaking the role of Personal Representative alone, you should contact a specialist Wills and Probate solicitor today to learn more about how we can help you. It is not worth going it alone, and risking making a mistake that could leave you personally liable for the debts after you have distributed the estate funds.
What happens if debt exceeds estate?
In the cases where the debt of a deceased person exceeds the value of their estate, the estate is considered insolvent.
In this case, it is crucial that you seek legal assistance as soon as possible, because creditors need to be repaid in a very specific order with the money that is available in the estate. If any mistakes are made, and a creditor becomes aware that debt of lower priority has been paid instead of theirs, once again the Personal Representative could be held financially liable for the outstanding debts.
If you are acting as the Personal Representative of an insolvent debt, it is in your best interest to seek legal advice from a solicitor specialising in Wills and Probate matters.
How do you deal with an insolvent estate?
No matter how confident you are that you are able to deal with the Estate of someone who has passed away, it is usually advisable to seek legal advice, such as from our team of Probate Solicitors in Lancaster. It can be risky for a Personal Representative personally if an Estate is not dealt with correctly.
One option available for insolvent Estates is something called an Insolvency Administration Order. This is like a Bankruptcy Order for someone who has passed away, and can be used if the deceased was not known to have an insolvent Estate until after they have passed away.
The Personal Representative is not the only one who can apply for an Insolvency Administration Order; the creditors of the Estate are also able to make this application.
Once the Order has been issued, a Trustee could then be appointed to control the Estate, who would then be able to pay the creditors off in the order of priority.
The order of priority is as follows:-
Secured Creditors (i.e. mortgages or secured loans)
Testamentary expenses (such as expenses incurred by the Personal Representatives as a result of administering the Estate, including the Probate Registry’s fee and legal fees).
Unsecured creditors (such as utility bills)
Interest due on unsecured loans
Debts such as those incurred between family members (known as "deferred debts")
The money in the Estate will be used to pay off any debts, in the order above, until it runs out. If there are still debts left once all the money has been used up, any remaining debts will usually be written off.
You can find more guidance about insolvent estates on the Law Society website.
Instructing MG Legal to deal with the Estate
The important thing to remember as a person’s Personal Representative is that you are entitled to seek legal assistance to deal with the Estate, so don’t struggle through dealing with matters alone.
You can contact our team of expert Wills and Probate Solicitors in Preston online, here, or email firstname.lastname@example.org. Alternatively, you can contact one of our team of Solicitors in Preston, or Garstang, by getting in touch online, or by 'phoning, or calling into your local office.