What happens if an estate is insolvent?

What is an insolvent estate?  

Almost all estates have some form of debt to settle, whether it’s an outstanding mortgage, an unpaid credit card bill or utilities. In most cases, the executor will pay these debts and distribute the remaining funds to the beneficiaries according to the Will.  

However, in some estates, the value of the debts is greater than the property, personal possessions and any other assets. In that case, the estate is insolvent, and the executor must follow specific rules to administer it correctly.  

The primary role of the executor in an insolvent estate is to sell the assets to cover the debts as far as possible. They must then repay the debts in a specific order of priority, which we will explain, and the intended beneficiaries are unlikely to receive anything of value.    

How to administer an insolvent estate? 

Given this additional complexity, as the executor, you need to carefully consider how you administer an insolvent estate, and whether you want to administer it at all. You have three options. You can: 

If you are happy to go ahead and administer the estate, you can. This route is usually the quickest and most cost-effective. It’s also the most common. You will have to follow certain rules, such as repaying the creditors in a prescribed way and ensuring you do not sell assets for less than they are worth. This option is also the most risky because if you get it wrong, you could become personally liable for certain debts.  

Another option for the executor is to apply to administer the estate under the direction of the court. In this case, the court will oversee the procedure, and you must act according to its instructions. Seeking approval from the court ensures you administer the estate correctly and can protect you from future creditor claims.  

Under an Insolvency Administration Order 

The other route is to apply for an Insolvency Administration Order. In this case, the court will appoint a trustee in bankruptcy (often an Insolvency Practitioner) to manage the estate and distribute the assets to the creditors. This route is less common, but it ensures the estate is managed for the benefit of the creditors and removes the risk for you.   

What’s involved in administering an insolvent estate? 

If you choose to administer an insolvent estate alone or with the court’s oversight, you must be careful to document everything you do to show you followed the rules. That includes seeking independent valuations for any assets and following a specific order of priority when paying the deceased’s debts as set out in the Insolvency Act 1986.  

Your first job when you agree to administer the estate is to determine that the estate is indeed insolvent. You can do that by assessing the total value of the deceased’s assets and comparing it against their liabilities. 

If the value of their debts, including funeral expenses, exceeds the value of their assets, the estate is insolvent. If the estate is insolvent, consider seeking advice from an Insolvency Practitioner, who will advise you of the implications and the correct process to follow.   

What would you have to sell in an insolvent deceased estate?   

As the administrator, it is your job to sell the assets of the insolvent estate and achieve the best possible price to satisfy the creditors’ claims. A common way to do that is by selling the assets at auction through so-called insolvency and liquidation auctions.  

These auctions are a transparent and verifiable method of selling the assets of insolvent estates. They can also provide professional valuations and set reserve prices to ensure assets do not sell for less than they are worth. This type of auction also offers a faster process than traditional sales methods, with competitive bidding driving prices up.  

At auction, you can sell property, vehicles, furniture, personal belongings, art and antiques. You can also sell any business assets they own.   

What is the order of priority in an insolvent estate? 

Once you have sold the assets, you can then use the proceeds to repay the creditors in a strict order. The hierarchy of payment is as follows: 

Importantly, the administrator must pay all the debts in each category before they can move on to the next. If you do not have sufficient funds to clear all the debts in one category, you must repay the same proportion of each debt rather than repaying some in full and not others.