We are sometimes asked by Executors or Administrators of an estate what would happen if the deceased person had accrued more debts than assets in their lifetime in estates in England and Wales. Do the debts die with the deceased? Our Amye Aris, Head of Wills and Probate at New Leaf Solicitors, explains more below.

WHEN WILL AN ESTATE BE DEEMED INSOLVENT?

If a deceased person left more debts (liabilities) than total assets in their estate (so that there’s not enough liquid assets to pay debts accrued) this would be classified as an insolvent estate.

 If this is the case, Executors need to pay creditors in a certain order as set down in law. Correct procedures must be followed, otherwise the Executors or Personal Administrators could be held personally responsible for any mistakes made or paying creditors in the incorrect order.

WHAT IS THE ORDER OF PRIORITY TO PAY DEBTS OF AN INSOLVENT ESTATE?

There is a strict order going from top priority to bottom as set out in the Insolvency Act 1986:

• Secured debts – this includes any debts secured against a property such as a loan or mortgage;
• Funeral expenses – The Personal Representative may pay for any basic funeral expenses on behalf of the deceased if they did not have a pre-paid funeral plan in place;
• Testamentary expenses – this includes solicitors and insolvency practitioner fees;
• Preferential creditors – these are rare but could include employees if the deceased had any;
• Unsecured debts – this would include creditors who have lent money to the deceased without any formal loan agreement or mortgage in place, or utility companies, credit cards etc;
• Interest due on unsecured loans;
• Deferred debts – examples being loans between family members.

It is important to note that all debts in a category must be paid in full before moving to the lower category. If there are insufficient assets to completely clear all the debts in one category, money should be apportioned between all those owed money in that category.

DO BENEFICIARIES TAKE ON THE DEBTS OF A DECEASED PERSON?

The short answer is no. If there is nothing left to pay all the debts, any remaining debts further down in priority would need to be written off. Personal debt would not be inherited if it’s in the sole name of the deceased. For joint liabilities, such as a joint mortgage, the survivor(s) would become fully liable for ensuring that debt is paid in full.

No money or personal possessions of value should be given to a beneficiary as part of wishes left within a Will if it is possible to sell these items and put that towards payment of the estate’s debts.

If the debts in the estate are relatively small, it may be possible to deal with all creditors informally and reach an agreement. If not, an Executor may need to take advice from an insolvency practitioner and or/obtain an Insolvency Administration Order from the Court. This is applicable only if the deceased owed more than £5,000 and there must be “reasonable probability” that the estate will be declared insolvent.

If you would like to speak to someone about Estate administration and Probate in general, please call 01908 542 677 or email us at [email protected]