Insolvent estates are unfortunately becoming a common feature in the current climate with property diminished in value and dramatic falls in share prices. An insolvent estate is an estate where the remaining assets are not sufficient to pay funeral expenses and discharge the deceased’s debts and liabilities.
It is important to establish as soon as possible if an estate is either solvent or insolvent. But identifying an insolvent estate is not always straightforward and is often a difficult task.
Legislation provides for how an insolvent estate will be administrated and in particular the payment of debts. It should be noted that it is not up to the executor to decide how the debts are discharged. The following is a list of the order of priority in which debts are discharged in an insolvent estate:-
- Funeral expenses have first priority in the administration of an insolvent estate. It is important to note that funeral expenses refers to are necessary funeral expenses only. After funeral expenses have been discharged the other debts are paid according to bankruptcy legislation.
- Secured creditors who have security by way of a mortgage are always in a better position than unsecured creditors. Where a bank has a mortgage over a property if the value of the property is less than the debt owed, the bank can realise their security and will then look to obtain the balance form the estate.Preference is given to certain unsecured creditors such as rates, taxes, wages to works etc.
- Preferential debts
- Unsecured debts
Considering the above list an personal representative/executor is unlikely to proceed to administer an insolvent estate, it is common that the party who administers an insolvent estate is the creditor who is owed the money. A person appointed as executor under a will can reserve or renounce the role as executor, but it is important to note that an executor may not find out straight away that an estate is insolvent and if they have ‘intermeddled’ in the estate. If they have already intermeddled in the estate ie involved in administrating the estate, a court order will be necessary to remove themselves as executor.
An insolvent estate can sometimes initially appear to be solvent. Two common examples include:
- Where the deceased estate has life cover and a mortgage. But if in the process of administrating the estate difficulties arise in relation to the life cover what appeared to be a solvent estate can very quickly become insolvent if the life cover is not paid out.
- Diminished Property Value: initially the value of the property appeared to cover the debts of the deceased but in the course of administrating the estate the value falls significantly and is no longer sufficient to cover the debts. The estate can become insolvent.
Finally, it is important to note that a person with a claim against an estate should not delay in looking to recover a debt from an insolvent estate. There is a limited time period of two years from the date of death to bring an action against a deceased’s estate, depending on the circumstances.