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What happens when a deceased’s estate is insolvent?

What happens when a deceased’s estate is insolvent?

Wednesday, 16 June 2021

The handling of a deceased’s estate is inevitably going to be a difficult time for the bereaved family, and it can add to the distress if the deceased’s estate is insolvent.

Whilst it’s not possible for a creditor to instigate typical bankruptcy proceedings against a deceased individual, a creditor can petition the court for an Insolvency Administration Order (“IAO”), under the Administration of Insolvent Estates of Deceased Persons Order 1986 (“AIEDPO”).

An Insolvency Administration Order under the AIEDPO is similar to bankruptcy proceedings but with additional provisions for matters such as funeral, testamentary and administration expenses.

As with bankruptcy proceedings though, there are various statutory costs (as follows):

  • Bankruptcy administration fee: £2,775
  • General fee: £6,000
  • Trustee’s fee: 15% of assets realised

Ordinarily, an insolvent individual could propose an individual voluntary arrangement (“IVA”) with their creditors to avoid formal bankruptcy proceedings. Based on the administration and general fee savings alone, this can often provide a better outcome than bankruptcy. Unfortunately, an IVA is not available for dealing with deceased estates.

However, Article 4 of the AIEDPO allows an insolvent estate to be administered without an Insolvency Administration Order. The estate still needs to be handled as though it were subject to bankruptcy provisions, but most importantly, the costs outlined above would not arise. Instead, the costs of the person/firm administering the estate can be agreed with the beneficiaries and creditors. The comparable costs are often cheaper, which should give a greater return to creditors.

Whilst a person handling an estate under Article 4 is not legally required to be a Licensed Insolvency Practitioner, the person would need to have suitable knowledge and understanding of bankruptcy procedures, processes, and law to fulfil their obligations. We would, therefore, recommend engaging a Licensed Insolvency Practitioner to help.

However, a creditor may wish to pursue an Insolvency Administration Order against a deceased individual. This might occur when, immediately prior to their death, the individual was beneficially entitled to an interest in a property as a joint tenant.

If so, the individual’s interest in the asset passes automatically on death to the surviving joint tenant(s). There is a provision within the AIEDPO legislation that allows the trustee to make an application to court for an order requiring the survivor to pay the trustee an amount not exceeding the value lost to the estate, for the purposes of settling debts and other liabilities.

If you find yourself dealing with an estate which may be insolvent, please get in touch with me or the Insolvency and Recovery team for further advice. Call 0330 024 0888 or email enquiry@larking-gowen.co.uk

Lee Green

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