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What is an insolvent estate?

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What is an insolvent estate?

Reviewed: 18th May 2018

When a person dies, their creditors are repaid from their estate. Some debts may be covered under certain provisions such as insurance policies, but otherwise they must be paid from the sale of estate assets.

If the total of the deceased person’ debts and liabilities is greater than the value of their assets, their estate is insolvent. Dealing with an insolvent estate can be a complex process, and great care must be taken to ensure that it is handled correctly.

Distribution of funds from an insolvent estate

If the distribution of monies from an insolvent estate is carried out incorrectly, the person(s) handling the estate can be held personally liable for the misdirection of funds. With various rules and regulations specific to insolvent estates, a high margin of error exists if the executor or personal representative isn’t aware of the issues.

Further complexity arises if a bankruptcy order was made against the deceased prior to their death, with the correct course of action depending on whether the order was actually granted by the court.

In the light of these issues, it’s easy to make a mistake when administering an insolvent estate, so what are the main points that should be considered?

A specific order of payment exists

As is the case when a person is made bankrupt, a specific order of priority exists with regard to the distribution of funds from an insolvent estate. This ‘hierarchy’ of payment ensures that certain categories of creditor are paid first, and begins with those holding security against one or more of the deceased’s assets.

So what is the full order of priority when it comes to making payments from an insolvent estate?

  • Secured creditors
  • Expenses of the funeral
  • Testamentary expenses
  • Preferential creditors
  • Unsecured creditors
  • Interest due on unsecured loans
  • Deferred debt (such as money loaned from a family member)

When a bankruptcy order exists

Sometimes a bankruptcy order will already have been made against the deceased person, in which case although some amendments may be made, the process generally carries on as normal.

If the deceased wasn’t subject to a bankruptcy order, or one had been applied for but not determined by the court, the Administration of Insolvent Estates of Deceased Persons Order, 1986, applies.

When there is no prior bankruptcy order

If no bankruptcy order has been made, or the court didn’t determine the outcome before the death of the individual, the person handling the estate should petition for an insolvency administration order.

In addition to the deceased’s personal representative, an insolvency administration order can be presented by:

  • A creditor
  • The supervisor of an Individual Voluntary Arrangement (IVA) to which the deceased person was subject
  • A temporary administrator
  • A liquidator

In some cases, the Official Receiver (OR) may be appointed to protect the estate’s assets during the time between the petition and the order being granted.

Insolvent estates can be extremely complex, and with the underlying risk of personal liability following the misdirection of monies, it’s highly advisable to seek professional assistance if you’re acting as personal representative.

Real Business Rescue can offer practical support and guidance throughout the process. Contact one of our experts for a free same-day consultation – With 55 offices stretching from Inverness down to Exeter, Real Business Rescue can offer unparalleled director advice across the UK.

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