What is an insolvent estate?

What is an insolvent estate?

When someone passes away, their debts are settled using the assets from their estate. Certain debts might be addressed through provisions like insurance policies, but otherwise, they must be paid from the proceeds of selling estate assets.

If the total debts and liabilities of the deceased exceed the value of their assets, the estate becomes insolvent. Managing an insolvent estate can be intricate, and it’s crucial to handle it accurately.

Distribution of funds from an insolvent estate

If the allocation of funds from an insolvent estate is done inaccurately, those managing the estate may be personally responsible for the mismanagement of funds. Dealing with various rules and regulations specific to insolvent estates increases the likelihood of errors if the executor or personal representative is not well-versed in these matters.

Things get more complicated if a bankruptcy order is issued against the deceased before their death. The correct course of action depends on whether the court actually granted the order.

Given these challenges, it’s simple to make errors when handling an insolvent estate. What are the key aspects that need careful consideration?

A specific order of payment exists

Similar to when an individual is declared bankrupt, there is a specific order of priority for distributing funds from an insolvent estate. This ‘hierarchy’ guarantees that certain groups of creditors are the first to receive payment, starting with those who have security against one or more of the deceased’s assets.

What exactly is the complete order of priority for making payments from an insolvent estate?

• Secured creditors
• Expenses of the funeral
• Testamentary expenses
• Preferential creditors
• Unsecured creditors
• Interest due on unsecured loans
• Deferred debt (such as funds loaned from a family member)

When a bankruptcy order exists

At times, a bankruptcy order may have been issued against the deceased individual. In such cases, while there might be some adjustments, the process typically continues as usual.

If the deceased was not subject to a bankruptcy order, or if one had been requested but not yet decided by the court, the Administration of Insolvent Estates of Deceased Persons Order, 1986, comes into effect.

Read More:

• Directors Are More At Risk Under New Small Business Regulations
• Top tips for reducing employee costs
• Understanding the Finance Act 2020 and director liability
• Understanding personal liability in Partnerships
• Steps to take when your cash flow is running low

When there is no prior bankruptcy order

If a bankruptcy order has not been issued, or the court did not reach a decision before the individual’s demise, the individual managing the estate should request an insolvency administration order.

Apart from the deceased’s personal representative, an insolvency administration order can be applied for by:

• A creditor
• The supervisor of an Individual Voluntary Arrangement (IVA) to which the deceased person was subject
• A temporary administrator
• A liquidator

In certain instances, the Official Receiver (OR) might be assigned to safeguard the assets of the estate during the period between the petition and the order being sanctioned.

Handling insolvent estates can be exceptionally intricate, and considering the potential personal liability arising from funds misdirection, it is strongly recommended to seek professional assistance if you are serving as a personal representative.

Vanguard Insolvency can provide practical support and guidance throughout the procedure. Reach out to one of our experts for a free same-day consultation.