Find out more about how to manage insolvent estates, what you need to know as an executor and tips on how the Bankruptcy Act can help.
As an executor managing a deceased estate can be challenging and quite daunting. Imagine the stress and anxiety when you find out that the deceased assets are insufficient to pay out the expenses and liabilities. An insolvent estate can be complicated. There are ways to proceed, and the process differs from the usual administration of a deceased estate. Let’s take a closer look.
What Is An Insolvent Estate?
Insolvent estates occur when the assets from a deceased estate are insufficient to pay out the liabilities and expenses, and money is owed. The administrator/executor or the legal personal representative LPR is responsible for administering the deceased estate. These cases must be managed differently from regular estates, and some laws govern the priority and order in which a creditor is paid. Subsequently, the legal personal representative may need to obtain administration advice from an experienced estate lawyer.
Administering An Insolvent Deceased Estate
The legal personal representative administering the estate can choose how to proceed. Insolvent deceased estates can be managed under state legislation, cases in New South Wales for example, fall under the Probate and Administration Act 1898, or a case can be managed under part XI of the Federal Bankruptcy Act 1966.
If following state legislation, the person administering the deceased person’s estate will need to apply to the court and distribute the estate as per the jurisdiction and priority stated in the state administration laws.
The Bankruptcy Act
The Bankruptcy Act 1966, specifically, part XI/chapter 11, allows the Federal Circuit Court to appoint a bankruptcy trustee to administer an insolvent deceased estate. The benefit of this act is that a trustee may recover property that may not have otherwise been available to them.
The administrator can apply to the Federal court for an administrator’s petition order to bankrupt the estate. The administrator may also be required to submit an affidavit, a statement of affairs, and prove that the deceased met the Australian connection requirements.
A bankruptcy trustee is appointed, and assets are distributed to creditors in priority order.
Two or more creditors may wish to apply for a creditor’s petition in some circumstances if the deceased debtor owes a creditor at least $10 000 or more. As per the bankruptcy regulations, the creditor must give the official receiver a copy of the administration order within two days.
The bankruptcy is then registered on the National Personal Insolvency Index NPII.
If the deceased person was already bankrupt upon their death, the bankrupt estate administration could continue to be dealt with by the official receiver.
Bankruptcy Rules On Death
Debts are not discharged automatically when someone dies. All of the liabilities in the deceased’s sole name will need to be repaid from the estate.
When a person dies and leaves an insolvent estate, there are rules of bankruptcy that need to be applied when paying a creditor. Under the Bankruptcy Act, the administration of a property is managed similarly to a living bankrupt. A trustee is appointed, assets are liquidated and paid out in order of priority. The administrator or executor must follow a specific order of priority to avoid personal liability.
The order of priority for payments is as follows:
- Secured creditor (a bank, financial institution or asset-based lender)
- Funeral expenses
- Testamentary and administrative expenses (legal costs, including obtaining grants etc.)
- Preferential creditor (income tax)
- Unsecured creditors (credit cards, landlord, utilities, bills etc.)
- Interest on unsecured loans
- Other debts (between family members)
Inheriting Personal Debt – What Is Your Liability?
As a beneficiary of a solvent estate, the assets must first be used to pay any outstanding debts. If there is a surplus, then distribution to beneficiaries can occur.
However, if the estate is insolvent and there are insufficient assets to cover all the debts, a person does not inherit the deceased person’s debt. Unless the debts are held jointly, or an individual has guaranteed payment of the dead person’s debt.
Whilst debts are not inherited by family members, and there are two exceptions to the rule:
- If the deceased’s loans had a third party guarantee, then the third party would be liable
- If the deceased gifted money within seven years before death, it may be considered avoidance of paying creditors
What About Life Insurance And Superannuation?
When administering insolvent deceased estates, certain assets are preserved and not available for the creditors. Life insurance policy proceeds are not allowed to be used to pay estate debts unless it is a funeral or testamentary expenses unless the will of the deceased or previous contractual agreements directs otherwise.
If the deceased held superannuation benefits and life insurance funds, the payments are distributed as per the nominations in the policy, the deceased’s will directive, or intestacy laws.
An insolvent estate is when the assets from the estate of the deceased are insufficient to pay the liabilities and expenses, and money is owed to the creditors. The administrator or executor or the legal personal representative LPR is responsible for administering the deceased estate.
An Insolvent deceased estate can be managed under state legislation in New South Wales under the Probate and Administration Act 1898 or under part XI of the Federal Bankruptcy Act 1966. The administrator of deceased estates can apply to the Federal court for an administrator’s petition to make the estate bankrupt.
When a person dies and leaves an estate that is insolvent, there are rules of bankruptcy that need to be applied when paying creditors.
If the estate is insolvent and there are insufficient assets to cover all the debts, a person does not inherit the deceased person’s debt. Unless the debts are held jointly or an individual has guaranteed payment of the deceased’s debt.
The legal personal representative may need to obtain advice from an experienced estate lawyer as the bankruptcy process can be complex.
1. What Does An Insolvent Estate Mean?
Insolvent estates are when the assets from a deceased estate are insufficient to pay the liabilities and expenses, and money is owed to the creditors. These estates must be managed differently from regular deceased estates, and some laws govern the priority and order in which the creditors are paid.
2. How Are Debts Paid In An Insolvent Estate?
When a person dies and leaves an insolvent estate, there are rules of bankruptcy that need to be applied when paying the debts and liabilities. There is a specific order of priority that needs to be followed; otherwise, the executor or legal personal representative of the deceased may be liable for mishandled money.
The administrator will utilise the estate assets to pay the creditors as per the priority rules, and any remaining liabilities are extinguished.
3. What Is A Creditor Of An Estate?
Debts are not discharged automatically when someone dies. All those liabilities in the deceased’s sole name will need to be repaid from the estate.
A creditor is a company or person who is owed money or a debt. When dealing with insolvent estates, the priority matters. Creditors can be secured, preferential or unsecured. For example, the lowest priority level, unsecured, may not be paid due to a lack of funds, unlike secured creditors such as a financial institution, who will be at the top of the payment priority list.