Who administers the estate of a bankrupt person / an insolvent estate?

It may not be the first thing on our minds when a loved one passes away, but dealing with an insolvent estate after a death can be complex.

It is vital that certain procedures are followed, and only particular individuals can deal with the process. Here we explain who administers the estate of a bankrupt person after they die. 

Many believe that a debt simply dies with an individual after they pass away. This is untrue, however, and any debts need to be paid before any beneficiaries receive any money from the estate.

Some of these debts, like a mortgage, may be covered by an insurance policy, but others will have to be repaid from the estate.

If the deceased person’s debts are greater than the total value of assets within the estate, the estate is insolvent. The same rules of bankruptcy apply to insolvent estates, meaning creditors must be paid in a certain order.

If correct rules and procedures are not followed, or mistakes are made, the person or people administering the estate could be held personally liable. 

Below we discuss what happens when an estate is bankrupt, who administers the estate of a bankrupt person, and how Percy Hughes & Roberts can assist with any probate queries.

If you have any questions we have not answered you can contact us by completing the enquiry form below or by calling 0151 666 9090.

When is an estate bankrupt?

Bankruptcy is the legal process that is followed when someone has become insolvent. It is a type of insolvency that applies to individuals and sole traders.

After someone dies, an estate becomes insolvent when there is not enough money to pay off their debts. If the value of the debt is greater than the value of the estate, it is an insolvent estate. 

In order to determine this, personal representatives need to work out the value of the estate and the amount of debt that is owed. The value of the estate includes:

• Property
• Land
• Cash
• Bank Accounts
• Car(s)
• Stocks & Shares
• Valuables (such as jewellery, art)

The full debt amount will include things like:

• Credit cards
• Mortgages
• Equity release
• Personal Loans
• Car Finance

Working the value out of these two pots is one of the key things that Personal Representatives need to carry out following a death. You can read more about the ten key tasks here. 

Who administers the estate of a bankrupt person?

The individual(s) who deals with the estate of a bankrupt person is the Personal Representative of the estate. The Personal Representative is the person who is legally entitled to administer the estate of the deceased.

The term “Personal Representative” is used as it includes both Executors and Administrators. 

If there is a will, one or more Executors will be appointed. Executors can obtain a Grant of Probate which gives them the power to manage and administer the estate. 

When there is no will, or the person appointed as Executor is unwilling or unable to act, the estate will instead be managed by an Administrator who will normally be a close relative of the deceased.

In order to become an Administrator, the individual must apply for a Grant of Letters of Administration which, once granted, confers on them the ability to administer the estate.

Once the Personal Representative has obtained a Grant of Probate from the Probate Registry, they will be able to access the deceased’s bank accounts and other accounts of interest.

They can then begin to calculate the estate’s worth and also start to work out the amount of debt that is owed.

From here, they can calculate payments to the creditors. Payments must be made according to a strict hierarchy, with the priority being:

• Secured Debts - Creditors whose debts are secured over a particular asset. For example, a mortgage
• Funeral Expenses - The Personal Representative is then allowed to pay for any basic funeral expenses using funds from the estate
• Testamentary Expenses - Fees or payments incurred by any representative when administering the deceased’s estate. Examples might be solicitor’s and insolvency practitioner’s fees
• Preferential Creditors - Individuals or organisations that have priority in being paid money. An example of this might be employees, if the deceased was an employer
• Unsecured Creditors - Creditors that have lent money without obtaining any specified assets as collateral
• Interest due on unsecured loans
• Deferred debts - e.g. loans between members of the family

Once money in the estate runs out, any remaining debts will need to be written off.

What is an Insolvency Administration Order?

There are a few options available to Personal Representatives when dealing with a bankrupt estate. The most common of these is called an Insolvency Administration Order (IAO).

This essentially declares the deceased person bankrupt, and can only be used if the individual hadn’t already been declared bankrupt before they died. 

An IAO allows the Personal Representatives to begin administering the estate through a framework where any assets owned by the deceased are used to pay any outstanding debts. If an IAO is not used, the estate will be wholly controlled by the Personal Representatives, meaning creditors may be able to pursue debts without any care for due process. 

Who can apply for an Insolvency Administration Order?

Insolvency Administration Orders can be brought to the court by:

• An executor
• A creditor or creditors jointly
• A temporary administrator
• A liquidator
• Where the deceased entered into a voluntary arrangement, the supervisor of that arrangement or a creditor bound by it
• The official petitioner, where the deceased person was subject to a criminal bankruptcy order

The debt owed by the deceased must be more than £5,000 and there must be “reasonable probability” that the estate will be declared insolvent. 

How does an Insolvency Administration Order work?

If the court grants an IAO, a licensed insolvency practitioner will be appointed and become responsible for administering the estate.

These practitioners have certain legal powers that Personal Representatives do not have, such as being able to recover property that has passed by survivorship. This often relieves a lot of the pressure on Personal Representatives.

In addition to this, the court may appoint an “interim receiver” between the presentation of the IAO to the court and it being granted.

The interim receiver can also administer the affairs of the deceased, which can provide a useful short-term solution that prevents any money being siphoned off before the practitioner is appointed.  

The practitioner will follow the correct procedure in relation to paying certain creditors first. In this sense, IAOs provide peace of mind for creditors, beneficiaries, and Executors/Administrators. 

IAOs can be complex and applying for one can be administratively complicated. We would always advise getting legal advice before taking any steps in applying for an Insolvency Administration Order.

How can Percy Hughes & Roberts help? 

At Percy Hughes & Roberts Solicitors, we have a team of dedicated probate solicitors who are ready to help you resolve your query or issue relating to this area of the law as quickly and effectively as possible.

If you need help with dealing with the debts of an estate, obtaining a grant of probate or letter of administration, or simply want guidance on dealing with the probate process, our wills, trusts, and probate solicitors have a wealth of experience.

They can assist you through what can be a traumatic time, dealing with estate and trust property and complex estates.

If you would like to contact one of our expert probate solicitors you can do so by calling 0151 666 9090 or by completing the “Get in touch” form on this site.