Insolvent Estates
In some situations, a deceased person’s debts may be greater than the overall value of their assets. This is referred to as insolvent estates – and in cases like these, the debts are to be paid off with the deceased’s assets, according to the rules of bankruptcy. It is important to note that the deceased’s debts cannot be inherited by those named on the Will and that if the debts cannot be paid off in their entirety, they technically die with the deceased. However, in the case that the debt is co-signed as a joint liability, or if there is a third-party guarantor, in most situations the deceased’s share will automatically be passed to the others involved with the debt.
It is important for the administrator of an estate to investigate and fully understand what debts are owed by the deceased, and to who they are owed. Once this has been deciphered, the executor must take great amounts of care in administrating the debts. If not handled properly and by correct procedures, creditors, organisations and people may be able to hold the executor personally liable.
None of the deceased’s assets should be given to any beneficiaries if there are confirmed to be outstanding debts, or if there are still uncertainties as to what debts may be owed. This includes anything that may be of value that could be sold to make up for debts.
Repayment hierarchy from deceased’s estate
In situations where an estate is insolvent, there is a legally laid out hierarchy, which outlines the priority in which debts need to be paid off. This hierarchy, from highest priority to lowest, consists of:
- Secured creditors – Debts such as mortgages
- Funeral costs – The cost of the funeral should be proportionate to the size of the estate
- Testamentary expenses – The expenses from the administration of the estate
- Preferential debts – Expenses like wages due to employees
- Ordinary debts – Debts to banks, credit card debts, utility bills, bank loans etc.
- Interest due on debts
- Deferred debts – Informal loans, between family members or friends etc.
A more in-depth breakdown of the priority of debts can be found here.
In some cases, debt may
crop up that the executor wasn’t aware of. In order to minimise the likelihood of this happening, it is advised to advertise in a local newspaper or The Gazette (through the use of a Deceased Estate Notice), which will allow the deceased’s creditors to come forward to make their associated debts known. This advertisement should be posted for a period of at least two months, and is not a legal requirement throughout the process, but is highly advised.
If an unknown creditor does come forward following the distribution of the estate, the executor is personally responsible for paying the debt.
Conclusion
It is important to understand the priority of debts when administrating a deceased relative’s estate as an executor. The potential risks are high should the procedure not be administrated properly. For this reason, it is important to pay due care throughout the process, ensuring that debts are paid in the correct order.
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