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Insolvent Estates – how to deal with them effectively

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With regard to insolvent estates people often wrongly think that when a person dies, his or her debts are automatically discharged.

A deceased’s debts will not be discharged on death unless specific provision has been made to ensure that they will be discharged, for example by an insurance policy payout.

Where such an insurance policy is not in place, all debts must be settled from the deceased’s assets. Where such assets are insufficient to settle all liabilities, the estate will be insolvent and labelled an insolvent estate.

Furthermore, where an estate is insolvent the deceased’s personal representatives are under a duty to act in the best interests of the creditors, rather than any legatees or the residuary beneficiaries of the deceased’s estate.

Which debts need to be paid first?

There is an order of priority under which debts need to be settled and surprisingly secured creditors rank in priority above the deceased’s funeral expenses. In practice, this can prove troublesome as often funeral expenses are settled long before a personal representative may realise that they are dealing with an insolvent estate.

Do relatives have to pay the debt when their relation dies?

If an estate is insolvent and the personal representatives do not deal with the estate in an appropriate way, they expose themselves to the risk of personally having to repay any fees that they might have drawn from the estate, in full, and with interest as from the date of death.

In addition, the personal representatives can be called upon to compensate the estate for any payments they might have sanctioned out of the estate to any creditor, or any beneficiary referred to in a Will, or on intestacy – otherwise than in accordance with the insolvency legislation.  They may have to do this, even if they cannot recover the money paid out to a creditor or beneficiary.

If you are appointed as a personal representative of an insolvent estate and require assistance with the estate administration please complete our contact form and will be in contact as soon as possible to provide you with guidance. 

Disclaimer: Anything posted on this blog is for general information only and is not intended to provide legal advice on any general or specific matter. Please refer to our terms and conditions for further information. Please contact the author of the blog if you would like to discuss the issues raised.