What Is An Insolvent Estate?
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. A person’s Estate is made up of all of their assets, such as any property that they own, money in the bank and investments, less any debts or testamentary expenses, such as funeral costs, credit cards, loans, etc.
If a person’s Estate has more negative ‘figures’ (liabilities and debts) than it has assets, it will be known as insolvent. Generally, this will mean that there isn’t enough money to pay off all of the debts owed.
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.
Paying off a person’s debts, after their death
When the Personal Representatives are dealing with a deceased person’s Estate in England and Wales, it’s important that their debts are dealt with.
The process of administering a person’s debts will depend on how these debts are held. For example, if the debt was in their sole name, it will be the responsibility of the Estate (or an insurance policy) to deal with full payment of the debt, if possible. If the debt was in joint names with another person who is still alive, the debt may be transferred to that person’s name. For example, a loan or mortgage held by two parties.
The Personal Representative may need to deal with selling any property or collecting in money from the bank before they are able to settle any debts. In these situations, our Probate Solicitors in Lancaster would advise contacting the companies or people who are owed money to explain to them that you are awaiting funds, and will start to deal with payment of their debt once you have some money from the Estate available.
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.
How do you deal with a solvent 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 Probate Solicitors in Lancaster 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.