Dealing with an Estate with Significant Debts

May 2024

The vast majority of estates will involve some kind of debt. This could be as simple as a few unpaid bills, or it could be a much more extensive issue.

Typical liabilities might include:

  • Utility bills.
  • Mortgages.
  • Car payment plans or PCPs.
  • Personal loans from a bank or building society.
  • Personal loans from family members or friends.
  • Credit card bills.
  • Bills for services such as personal care, cleaning or property maintenance.

Almost all bills and liabilities will need to be addressed by the estate. The exception to this is any outstanding student loans, which are cancelled on death.

In most cases, the personal representatives will be able to cover all outstanding debts and liabilities either from the estate’s bank accounts or from any money earned from selling property or assets belonging to the estate. Once all the creditors have been paid, any remaining money can then be distributed to the beneficiaries.

What if an estate has extensive debt?

This process is likely to be more complicated for estates where the debt is significant. It can be difficult for personal representatives to navigate a situation such as this, especially if the extent of the debt has come as a surprise.

There’s no doubt that taking on responsibility for an estate with extensive debt is going to be difficult. We would strongly recommend seeking legal advice before moving forward with administering an estate under these circumstances. There may well be specific rules you’ll need to follow concerning which order to pay creditors in, especially if the estate turns out to be insolvent.

Failing to follow these rules could leave you vulnerable to becoming personally liable for the estate’s debts.

Is the estate insolvent?

In these situations, personal representatives will need to consider whether the estate is solvent or not. An estate is considered insolvent if there is not enough money to cover all the outstanding liabilities, even once property and other belongings have been sold.

If an estate is insolvent, any money or valuables must go towards covering the debt. There will not be anything left over for beneficiaries, whatever is said in the Will. When an estate is insolvent, any debts that are still unpaid once the estate has been wound up will usually be legally written off.

It’s important to note that an estate is only considered insolvent if there is not enough money to pay debts, even if doing so means there will not be any money left to pass to the beneficiaries. This means that an estate can still be considered solvent even if there is not enough money to honour any cash bequests detailed in the Will.

When you have determined that an estate is insolvent, it may be appropriate to apply for support. This could be under direction of the court or as part of an insolvency administration order. You can find out more about dealing with an insolvent estate in our help guide on the subject.

What to keep in mind

If you have found yourself responsible for administering an estate with significant debts, it will become even more important to work through the process carefully and systematically.

The biggest concern about debt when administering an estate is the question of whether or not there will be enough for the estate to pay off everything that is owed. If there is any hint that there might not be, you will need to ensure you have fully assessed the situation and identified all creditors before you pay any bills at all. It is wise to ensure you have fully documented this process.

You will also need to carefully weigh up the benefit of using any funds belonging to the estate to cover things such as funeral or legal expenses. These things are likely to be necessary, but if there’s a possibility that the estate is insolvent, personal representatives and other family members may wish to consider covering these costs themselves. This is because of the risk of challenges by creditors if it later turns out that there’s not enough money to pay all debts.  

There is always a risk of personal representatives being held legally responsible for any mistakes made during the process of administering an estate. This risk can be higher in the case of significant debts, especially if the estate turns out to be insolvent. Creditors could take legal action against personal representatives if they are found to have paid debts in the wrong priority order and there is not enough money left to pay a debt that should have been prioritised.

How can you protect yourself in these situations?

The best way to protect yourself against possible legal action is to ensure you have accessed specialist support. An experienced professional will be able to advise you on how best to approach an estate with extensive debts in order to best serve both creditors and beneficiaries, while ensuring that nothing vital gets missed.

If you are looking for support in this area, our experienced team will be able to advise on your next steps.

How Roche Legal can help

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