Contrary to popular belief, the death of an individual does not release them from debts incurred during their lifetime. Instead, the payment obligation falls on their estate.
When a person dies, their estate may be deemed insolvent if its value is insufficient to meet its debts and liabilities in full. In these circumstances, administration of the insolvent estate is governed by the Administration of Insolvent Estates of Deceased Persons Order 1986, a statutory instrument which is to be read in accordance with the Insolvency Act 1986. The order can apply to those who die insolvent and those who die after a bankruptcy petition has been presented against them but has not yet been determined.
The personal representative (executor) of the estate can apply to the bankruptcy court for an Insolvency Administration Order (IAO), which is equivalent to a debtor’s petition for bankruptcy. Conversely, a frustrated creditor who has not been able to secure a reasonable payment plan can also apply for an IAO in respect of a deceased debtor’s estate. The creditor (or creditors jointly) must demonstrate that it is ‘reasonably probable’ that the estate is insolvent, and that the debt owed to them would have been sufficient to support a bankruptcy petition against the deceased had he or she remained alive.
If you are the chosen personal representative of an individual’s estate and you believe that it may be insolvent, you must take great care and seek legal advice before paying any of the deceased’s debts. You can be held personally liable if the correct procedure is not followed when paying creditors.
There is a specific order, verified by law, in which debts must be paid from the insolvent estate:
1. Secured debts: Creditors whose debts are secured over particular assets (e.g. a mortgage over a property) will have the right for their debts to be repaid, in full, from such assets.
2. Funeral expenses: The costs of a basic funeral for the deceased are then permitted.
3. Testamentary and administration expenses: These include the fees incurred for any representatives carrying out duties in relation to the administration of the deceased’s estate. This can include solicitor’s and insolvency practitioner’s fees.
4. Preferred and preferential debts: For example, if the deceased employed people, their wage arrears or holiday pay would be considered preferential.
5. Unsecured creditors: A creditor other than a preferential creditor, who does not have the benefit of any secured assets.
This considerable list usually means that there will be nothing left over for any beneficiaries of the estate. If you have been named as the executor of someone’s estate and you believe that they may have significant debts to pay, it is very important that you seek legal advice to assist you. Both the Private Client and Business Restructuring and Insolvency Teams at Clarion have demonstrable skills and experience in this area.
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