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

English law 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.

1. Secured creditors: creditors with a legal charge over an asset (for example, a mortgage lender holding a charge over the deceased's house). They are entitled to be paid from the proceeds of that asset before anyone else.
2. Funeral, testamentary, and administration expenses: reasonable funeral costs, the cost of obtaining probate, and the reasonable costs of administering the estate come next. These are given priority because someone must be able to pay for the funeral and wind up the estate.
3. Preferential debts: certain debts owed to HMRC have preferential status — specifically, unpaid income tax, National Insurance contributions, VAT, and some other taxes for a limited period before death. The rules here are technical and have changed over the years.
4. Unsecured creditors: the bulk of most debts — credit cards, personal loans, utility bills, council tax arrears — sit here. If there is nothing left after the above categories are paid, unsecured creditors receive nothing and must write off the debt.
5. Deferred debts: debts owed to spouses or civil partners, or interest on debts after the date of the insolvency order, are 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.

Under this Order, if an estate is insolvent, the administration process broadly mirrors the bankruptcy process for a living individual. The Order sets out the priority of debts (as above) and provides a mechanism for creditors to petition the court for the estate to be administered under the supervision of an insolvency practitioner if the executor is not dealing with it correctly.

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.

However, instructing a licensed insolvency practitioner (IP) is strongly advisable 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 2 above) — so they are paid before unsecured creditors. Their involvement provides protection to the executor and ensures creditors are dealt with in the correct order.

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 (the official public record) and in a local newspaper, and wait at least two months before distributing — this gives you statutory protection under the Trustee Act 1925 against unknown creditors
• 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
• Seek legal advice if you have any doubt about whether the estate is solvent