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WHAT IS AN INSOLVENT ESTATE
INSOLVENT ESTATE The Personal Representatives have a duty to pay the debts of the estate and must do so with due diligence. An insolvent estate is if there are not enough assets to pay all of the debts. Different rules as to the payment of debts apply depending upon whether it is a is solvent or insolvent estate.
THE SOLVENT ESTATE An estate is solvent when the assets are sufficient to pay funeral, testamentary and administration expenses and debts and all other liabilities in full.
THE INSOLVENT ESTATEÂ If there are insufficient assets to pay the debts and liabilities, there is an insolvent estate. An insolvent estate needs to be administered in accordance with the Administration of Insolvent Estates of Deceased Persons Order 1999. There is a set procedure for dealing with these and legal advice is greatly advised as the process is complicated.
It is important for the Personal Representative to be aware that in the case of an insolvent estate, the creditors are entitled to be paid in a strict order of priority which is:
(a) Funeral, testamentary and administration expenses, then
(b) Other debts in accordance with a bankruptcy order.
For unsecured debts then on a pro rata basis in proportion to the net assets and the value of each individual debt paid from the insolvent estate. This order of priority of payment cannot be varied under the terms of the will or intestacy rules or by the Personal Representatives. If the Personal Representatives, do not follow the statutory order under the insolvent estateÂ they will incur personal liability for “superior” debts which have been left unpaid. Therefore, if there is any possibility that there is an insolvent estate, the personal representatives should observe the statutory order strictly when paying debts.
EXAMPLE OF HOW INSOLVENT ESTATE DEBTS ARE PAID If the total assets are worth Â£10,000 and the funeral and testamentary expenses amount to Â£2,000 and there are other unsecured debts totalling Â£16,000 then the creditors will receive 50% of their outstanding debt.