Insolvent Estates: When the Deceased's Debts Exceed Their Assets

Discovering that the person who died left more debts than assets is distressing and can feel overwhelming. But it is essential to understand from the outset that — in most cases — neither you as executor nor the deceased's family will be personally liable for those debts. What matters is following the correct procedure for winding up an insolvent estate.

The Executor Is Not Personally Liable for the Deceased's Debts

This is the single most important point for families and executors to understand. When someone dies with debts, those debts are owed by the estate — not by their family, their spouse, or their executor. Creditors cannot pursue family members for debts that were solely in the name of the deceased.

There are two important exceptions to this rule:

• Joint debts: if the deceased had a joint mortgage, joint loan, or joint credit card with a surviving partner or family member, the survivor remains fully liable for the whole debt
• Guarantor debts: if a family member provided a personal guarantee for one of the deceased's debts, they are liable on the guarantee

Executors should also be aware that they can become personally liable if they distribute estate assets to beneficiaries before paying off creditors — see below.

The Strict Priority Order for Paying Debts

The law of England and Wales sets out a strict hierarchy for paying the debts of an insolvent estate. Creditors are paid in this order, and those further down the list only receive anything if money remains after those above them are paid in full.

A secured creditor sits outside this ranking entirely. A creditor with a legal charge over an asset — most often a mortgage lender with a charge over the deceased's house — takes what it is owed out of that asset, because the security is the lender's. It is not competing with the creditors below for a share of the estate. If the asset sells for more than the debt, the surplus falls into the estate for the other creditors. If it sells for less, the shortfall drops down and ranks as an ordinary unsecured debt.

What remains is then applied in this order:

1. Reasonable funeral, testamentary and administration expenses: reasonable funeral costs, the cost of obtaining probate, and the reasonable costs of administering the estate. Article 4(2) of the 1986 Order gives these express priority over the preferential debts — this is the one point where an insolvent estate departs from ordinary personal bankruptcy.
2. Ordinary preferential debts: unpaid contributions to occupational pension schemes, and arrears of pay owed to the deceased's employees up to a prescribed limit. These arise only where the deceased was an employer, so most estates have none.
3. Secondary preferential debts: VAT owed to HMRC, and deductions the deceased was required by law to take from payments to other people and hand over to HMRC — PAYE and employees' National Insurance in particular. These were made preferential again by the Finance Act 2020.
4. Ordinary unsecured creditors: the bulk of most debts — credit cards, personal loans, utility bills, council tax arrears — sit here, together with any income tax the deceased owed on their own account. If there is nothing left after the above categories are paid, unsecured creditors receive nothing and must write off the debt.
5. Interest accrued on those debts since the date of death.
6. Deferred debts: credit provided by someone who was the deceased's spouse or civil partner is at the very bottom of the hierarchy.

The Legal Framework: The Administration of Insolvent Estates of Deceased Persons Order 1986

The Administration of Insolvent Estates of Deceased Persons Order 1986 (SI 1986/1999) is the statutory instrument that governs the administration of insolvent estates. It applies the principles of personal insolvency law to deceased estates.

Article 4(1) is the operative provision. Where an insolvent estate is being administered outside bankruptcy, it applies to the estate the same bankruptcy rules on the respective rights of secured and unsecured creditors, on which debts are provable, and on the priority of debts. Article 4(2) then makes the single change described above: reasonable funeral, testamentary and administration expenses have priority over the preferential debts.

The Order is made for England and Wales only. Scotland deals with an insolvent deceased estate through sequestration under the Bankruptcy (Scotland) Act 2016, and there is no probate — the equivalent grant is confirmation. Northern Ireland has its own equivalent order. If the estate you are dealing with is in Scotland or Northern Ireland, the order of priority on this page is not the one that applies.

Under the Order, a creditor may also petition for the estate to be administered in bankruptcy, in which case a trustee takes over from the executor.

In practice, many insolvent estates are administered informally — without a formal court process — by the executor following the correct priority order. However, where the estate is complex, the debts are disputed, or creditors are pressing hard, a more formal approach may be necessary.

When to Instruct an Insolvency Practitioner

In straightforward cases of modest insolvent estates — for example, where the only assets are a small amount in a bank account and the debts are simply credit cards and personal loans — an executor may be able to wind up the estate themselves by following the priority order carefully.

Executors more often bring in a licensed insolvency practitioner (IP), or a solicitor, where:

• The estate includes a business, commercial debts, or complex assets
• There are disputed debts or creditors threatening legal action
• The total debts are significantly larger than the assets, and creditors are actively pressing for payment
• You are uncertain about whether any debts fall into the preferential category
• There is any risk of claims that assets were transferred out of the estate shortly before death to avoid creditors (transactions at an undervalue or preferences)

Insolvency practitioners charge for their services, and their fees rank as administration expenses (category 1 above) — so they come out of the estate ahead of the unsecured creditors, reducing what those creditors receive. No official body publishes a scale of insolvency practitioners' fees for deceased estates, and there is no published typical figure; a practitioner will quote for the particular estate.

The Critical Risk: Distributing Too Early

The most serious risk for an executor dealing with an insolvent estate is paying beneficiaries or settling lower-priority debts before higher-priority creditors have been paid in full. This is known as "devastavit" (wasting the estate), and it can result in the executor becoming personally liable to unpaid creditors.

This risk is particularly acute in situations where:

• The executor does not realise the estate is insolvent at the outset — debts emerge after the initial distribution has been made
• The executor knows the estate is tight but hopes the debts can be covered, then pays a beneficiary before confirming all creditors are satisfied
• A creditor is overlooked because the executor did not advertise for creditors before distribution

To protect yourself as executor, always:

• Advertise for creditors in The Gazette and in a newspaper circulating in the district in which the land is situated, and wait for the period fixed in the notice, which cannot be less than two months — this is the notice under section 27 of the Trustee Act 1925, and it protects you against creditors whose claims you had no notice of
• Obtain a full list of all known debts before making any payment to beneficiaries
• Pay creditors strictly in priority order, not simply those who ask first or most loudly

A section 27 notice protects you from claims you did not know about. It does not protect you from a creditor you did know about, and it does not stop a creditor following the money into the hands of a beneficiary who has already been paid.