Insolvent Estates

Please note that the advice on this page relates to England and Wales. Please consult a legal professional for any differences that may apply in Scotland and Northern Ireland.

Personal debt cannot normally be inherited provided the debt was incurred in the name of the deceased only, usually referred to as ‘sole name’. There are two exceptions, the first of which is if the debt was guaranteed by a third party in which case the third party would become liable. The second is if the deceased had gifted money not long before the death which could be interpreted as an attempt to avoid payment to creditors from the estate.

However for joint liabilities e.g. a mortgage or utility accounts on which two or more people are named, the survivor(s) does become fully liable for continued payments. If there will be problems for the survivor meeting these commitments it is better to contact the bank, building society or utility providers as soon as possible to make them aware of the changed circumstances. Money owed by the deceased continues to be owed from the estate after their death which in some cases may mean a charge is placed against a jointly owed property.

If the person who died had already been declared bankrupt, the trustee or official receiver should be notified and they will continue to deal with the estate.

Great care should be taken in the administration of an insolvent estate i.e. an estate where the value of the assets in the estate amounts to less than the debts left by the deceased. Creditors, people or organisations to whom money is owed, may hold a personal representative personally liable if correct procedure is not followed. If you are named as the executor in the Will of someone who has died leaving an insolvent estate we would recommend you seek advice as to whether you should renounce the role.

Even if the deceased has left a Will, no money can be given to a beneficiary if there are outstanding debts. You should not give beneficiaries any belongings of the deceased that may be of value, such as jewellery or a vehicle, if there is any possibility that they may need to be sold to meet debts. However, it will usually be better to dispose of ordinary household items and clear a property to avoid paying additional rent on a rented property.

If you have any concerns that your home may be at risk please seek legal advice or advice from a specialist debt advisory service as soon as possible and always before you make any payments – see Useful Contacts.

If, once creditors have been made offers which have been accepted, additional money is found in the estate, that money must also be offered to creditors in the appropriate percentages. Only after all creditors have confirmed in writing that their files are closed and remaining debt written off, can any money be given to beneficiaries.

The order in which debts should be paid

There is a legally laid down priority in which debts must be paid from an estate which is given below.

WARNING: If an organisation such as a bank has multiple assets, e.g. a current account, a savings account, a credit card and a loan, they can legally put all those accounts together to discover if there is an overall positive or negative balance. Therefore it will probably not be possible to use money from a savings account with money in it to pay for a funeral, if there is an overall debt to the bank.

  • Secured creditors - They will recover what they are owed from the asset which secures the debt. Examples of a secured debt are a mortgage on a property or a loan for purchase of a car. If the asset against which the debt was secured does not cover the entire debt, the balance of the debt falls into the unsecured creditors category.
  • The funeral expenses - These should be reasonable and proportionate to the size of the estate. For example one cannot use £6000 of a £7000 estate on the funeral if there are also debts of several thousands of pounds. A gravestone or other permanent memorial is not considered to be part of the funeral expenses. Family members who pay for a funeral from their own money may find it difficult to recover the money later if there are other creditors. Please do not arrange a funeral if you do not know where the money to pay for it will come from. Call us for more information on what to do in this situation.
  • Testamentary expenses - These are the expenses you incur as part of the administration of the estate. You should keep a careful record of these and keep any receipts for petrol or train journeys, postage etc. You may also want to ask for proof of posting certificates at a Post Office which are free of charge.
  • Preferred debts and Preferential debts - these are very rare and will not apply in most cases. Wages due to employees are preferential debts and this may apply where the deceased received direct payments for employing carers.
  • Unsecured creditors - e.g. debts to local and central government. utility bills, bank loans, credit and store card debts.
  • Interest due on unsecured loans.
  • Deferred debts – an example would be an informal loan between family members.

Legally, all the debts must be paid strictly in this order and all debts in 1 take priority over those in 2 and so on down the list.

Please note that all debts in a category must be paid before moving onto the next category. If there is insufficient money to completely clear the debts in one category money should be paid to each one in proportion to the money owed.

If the insolvent estate's debts are small it may be possible to deal with creditors informally. We have two letter templates which you may find helpful if this is the situation.

Information on this page has been verified by the legal professionals at Chorus Law.

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