Deceased Insolvent Administration Order
It is a common misconception that when a person dies, his/her debts are automatically discharged. Debts are not discharged on death unless specific provision has been made for them to be discharged, e.g. by an insurance policy. All debts that are not provided for must be met from the assets of the deceased debtor. Where the assets are insufficient to meet all the debts, the estate is insolvent and a Deceased Insolvent Administration Order can be applied for.
Where a person dies before a bankruptcy petition is presented, a petition for an Deceased Insolvent Administration Order can be presented under the Administration of Insolvent Estates of Deceased Persons Order 1986 (AIEDPO86). The administration of the insolvent estate is dealt with under the provisions of the AIEDPO86, which applies and amends certain provisions of the Insolvency Act 1986.
Where a person dies before a bankruptcy petition has been presented, a petition for an insolvency administration order can be presented to the court by;
Where the petition is presented by a creditor or personal representative the court must be shown that it is reasonably probable that the estate is insolvent before an insolvency administration order will be granted.
Between the presentation of the petition and the making of an insolvency administration order, the court may appoint the official receiver as interim receiver to protect the assets.
What happens to the deceased’s assets?
The deceased debtor’s assets vest in the ‘Trustee in bankruptcy’ and will be dealt with in the same was as in any other bankruptcy. For example, household goods are exempt, but other assets, which may include heirlooms or gifts during the course of a marriage, etc, will not be.
A deceased’s person’s biggest asset is often their interest in a property. What happens to the property depends on how it was owned by the deceased and how the date of death interacts with the date of petition and order (although this is not covered here).
Where the property is owned as tenants in common the bankrupt’s property will automatically form part of the bankruptcy estate and realised by the trustee subject to normal bankruptcy rules.
The property may also however be owned under a joint tenancy. Where that is the case, the property interest will pass automatically to the other joint owner or owners by right of survivorship, and will never become part of the insolvency estate.
However, in a joint tenancy situation the trustee may seek to recover the value of the deceased debtor’s interest in the property that has been lost to the estate by making an application to the court. On the application of the trustee the court may make an order requiring the surviving partner to pay to the trustee an amount not exceeding the value lost to the estate. This is awful news for the surviving spouse or partner, but good news for creditors who may have thought they had lost the opportunity to recover their funds.
What is the impact on the personal representatives?
The personal representatives need to carefully handle the estate up until they understand the true financial position. Failing to do so can find them personally liable for their actions.
Once the position is known they must act at all times with their minds firmly on the provisions of the Insolvency Act and consequences thereof. Applying for a Deceased Insolvent Administration Order is the safest course of action for personal representatives as it means somebody who is fully qualified, licensed and regulated in the area of insolvency will take over.
Once the order is made, the personal representatives are no longer responsible for the estate. All they must do is hand over whatever they hold to the trustee in bankruptcy.
It may not be possible for funeral and testamentary expenses to be paid from the estate, so a personal representative should not make a payment for these until the financial position is known.