The insolvent estate – beware of the pitfalls

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Being appointed an executor in someone’s Will can be seen as something of an honour, as it indicates that the person trusts and respects you, but it is also a responsibility.  Usually administering an estate is straightforward, if sometimes a little heavy on paperwork.

However, there are circumstances where an executor needs to be very careful in order to avoid personal liability.  This month, Carolyn Monaghan explains the potential pitfalls of an insolvent estate.

The Insolvent Estate

If there is not enough money in the estate of the deceased to pay all the debts, the estate has to be carefully administered in accordance with the laws of bankruptcy.  Debts have to be paid in a particular order, which is:

  1. Secured debts – such as a mortgage
  2. Bankruptcy expenses - if a formal bankruptcy is entered into
  3. Funeral, testamentary and administration expenses
  4. Preferential debts – for instance, some payments to pension companies
  5. Ordinary debts
  6. Interest on 4 & 5
  7. Deferred debts – such as money owed to family members, and
  8. Beneficiaries under a will or intestacy (however, in reality they will receive nothing)

The executor needs to ascertain to which category each debt belongs, and then work through each category in turn.  Secured debts are dealt with first; if the deceased had a mortgage, the Building Society is a secured creditor and is entitled to have the house sold and the sale proceeds used firstly to pay off any money owed on the mortgage.  If there is any money left over, it will go into the pot to be used to pay other debts, but if the sale proceeds are not enough to pay the mortgage in full, the balance of the debt will be added to the category of Ordinary Debts.

After that, any creditors in a category must be treated exactly the same.  For most people, after the mortgage and funeral are paid, the next category with anyone in it will be ordinary debts, such as the gas bill and credit cards.  It is vital that every creditor is paid the same proportion of their debt – so if £5,000 in total is owed and there is only £2,500 in the estate, each creditor will receive 50% of the amount of their debt.  If one creditor in a category is paid, say, 52% of the debt by mistake, the executor could be personally liable to make up the shortfall to each of the other creditors in that category.

If everyone in a category has been paid off in full, the executor can move on to the next category and repeat the process.

If you are in a position where you are acting as an executor and are in any doubt about how to administer an estate, don’t risk it – take advice.


Regards

Carolyn

What's the next step?

Carolyn Monaghan

Legal Executive
& STEP practitioner

Call today on

0113 254 9733

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