What happens if an estate does not have enough money to pay its debts?

When an estate does not have enough money to pay its debts, it is legally considered insolvent. The remaining unpaid debts are typically written off without falling onto family members.

Even so, this can be a worrying discovery for families, and so it helps to know the implications of this scenario and its process. That’s what we’ll focus on in this article.

What happens to the money and debt

Here’s what to expect:

Assets are sold

All available money, savings and valuable possessions are gathered and, where needed, sold to raise funds.

Strict order of priority

The funds are paid out according to a legal hierarchy. In England and Wales, this is set by the Administration of Insolvent Estates of Deceased Persons Order 1986, with funeral and administration expenses near the top.

Proportional payouts

If a category cannot be paid in full, creditors within that tier receive a proportional share of what is available.

Debts written off

Once the funds run out, any remaining unsecured debt is written off by the creditors.

Beneficiaries get nothing

Sadly, family members or others named in the will receive no inheritance.

Who is liable for the debts?

Relatives are protected

The surviving family aren’t required to pay the debts of the deceased from their own pockets.

Exceptions for joint debt

Relatives may only be liable if they co-signed a loan, held a joint account or acted as a guarantor.

Executor risk

Executors are not liable for the debts themselves.

However, they can become personally liable if they pay lower priority debts first, or pass money to beneficiaries before clearing debts.

If an estate might be insolvent, an executor is advised to pause all payments and take advice. Taking advice early also helps you answer creditors’ questions with confidence.

Professional takeover

Executors can apply for an Insolvency Administration Order to hand administration over to an insolvency practitioner. This can be a sensible option where the estate is complex or creditors are pressing for payment.

Talk to our experienced team

Our solicitors can help you assess whether an estate is insolvent and deal with creditors in the correct order. Reach out to our friendly team on 01248 671994.