There is plenty of information around giving details about what happens to assets when a person passes away and how things should be dealt with, but some people also tend to forget that a deceased can have liabilities as well.
For most solvent estates (i.e. estates where the deceased had more assets than liabilities), common debts and liabilities might include utility bills (such as gas and electric or water), credit cards, personal finance agreements and funeral costs. It also includes any outstanding mortgages or equity release.
When administering an estate the debts must always be paid off first before any distributions can be made to beneficiaries. Sometimes liabilities can be settled from money held in banks, other times it might have to wait until a property is sold to release funds.
However, not every estate has assets and sometimes people pass away with an estate where the debts exceed the assets (i.e. an insolvent estate). But what happens in these circumstances? Sometimes an order can be granted by the court (an Insolvency Administration Order) which will dictate what happens and who gets paid accordingly. Other times an Official Receiver or Insolvency Practitioner might deal with the matter.
However sometimes where the estate (or debts) are not too significant, the personal representatives of the deceased might wish to sort the administration themselves using a more informal route. There is then a hierarchy of which debts must be paid first which the personal representatives must follow. This is:
- Secured creditors – such as mortgages, equity release or secured loans
- Funeral expenses
- Testamentary expenses – i.e. reasonable costs incurred by the personal representatives in dealing with the estate such as solicitor fees, probate fees etc.
- Preferential creditors
- Unsecured creditors – such as utility bills
- Interest due on unsecured loans
- Deferred debts – such as loans between family members
A common belief is that the outstanding debt (once all assets have been used) then passes to the family for them to pay. This is not true. If an estate cannot pay remaining debts after its assets have been used to settle as much as possible then the debt dies with the estate. It does not pass on to the family for them to pay out of their assets.
Dealing with the loss of a loved one is hard enough, but having to deal with an insolvent estate can sometimes lead to even more stress at a time of hardship. We are always happy to assist with the administration of estates and provide an initial free one hour appointment to discuss such matters.
If you have any questions about administering an estate or wanted assistance with one, then please do contact us on 01206 835261 and we would be happy to provide further information or assist however possible.