Insolvent Estate: 7 Key Points You Should Know

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When you’re dealing with an insolvent estate, the stakes are high and the process can be complex. If you’re an executor or a beneficiary, understanding your legal rights and responsibilities is crucial. 

This guide will walk you through nine essential points to ensure you’re fully informed and prepared to handle these challenges. Let’s demystify the legal landscape and equip you with the knowledge you need to manage an insolvent estate confidently.

What does insolvent estate mean?

An insolvent estate means the person who has died had more debts than assets when they passed away.  Their assets (things they owned like property, money, etc.) aren’t enough to cover all their debts (money they owed to others).  This can be a tricky situation for those left behind, and there are specific legal processes to follow in Australia when an estate is insolvent.

Also read: How To Find Deceased Estate Sales in QLD

Who can declare an estate insolvent in Australia?

There are two main ways an estate can be declared insolvent:

  1. By the executor or administrator: The person responsible for managing the estate (the executor if there’s a will, or administrator if not) can apply to the court to declare the estate insolvent. They’d do this if they realise during the administration process that the debts are greater than the assets.
  2. By a creditor: If a creditor is owed a significant amount of money (currently $5,000 or more), and they believe the estate is insolvent, they can also apply to the court to have it declared insolvent.

It’s important to note that simply being behind on bills or having some outstanding debts doesn’t automatically make an estate insolvent. The total value of the debts needs to be greater than the total value of all the assets in the estate.

How are debts paid if an estate is insolvent?

When an estate is declared insolvent, there’s a specific order in which debts are paid, outlined by the law:

  1. Secured Debts: These are debts tied to a specific asset, like a mortgage on a house or a car loan. The secured creditor has the right to sell the asset to recover their money.
  2. Funeral and Testamentary Expenses: This includes the costs of the funeral, the executor’s or administrator’s fees, and any legal costs involved in administering the estate.
  3. Unsecured Debts: These are debts not tied to a specific asset, like credit card debts, personal loans, or medical bills. Unsecured creditors are paid last, and only if there are any funds left after the secured debts and expenses are settled.

Often in insolvent estates, there isn’t enough money to cover all the unsecured debts. In this case, the remaining funds are divided proportionately among the unsecured creditors. This means each creditor receives a percentage of what they’re owed, based on how much is available.

It’s important to note that creditors can’t chase you personally for the deceased’s debts unless you were a co-signer or guarantor on a loan.

Also read: Rights of Beneficiaries of a Will in QLD: 5 Rights You Need to Know

What happens to the executor if an estate is insolvent?

The executor of an insolvent estate faces a unique set of challenges. Their primary responsibility is still to administer the estate according to the will or the rules of intestacy (if there’s no will), but they need to be very mindful of the financial limitations.

Here are some key things that can happen to the executor:

  • Increased Scrutiny: Their actions will be under close scrutiny by creditors and beneficiaries. They need to ensure they act fairly and transparently, prioritising the payment of debts according to the legal order.
  • Personal Liability Risk: Executors need to be very careful to avoid any actions that could expose them to personal liability for the estate’s debts. This could happen if they mismanage the estate’s funds or pay out money to beneficiaries when it should have gone to creditors.
  • Seeking Legal Advice: It’s crucial for the executor to seek legal advice from a will and estate lawyer throughout the process. The laws surrounding insolvent estates can be complex, and professional guidance can help them navigate these complexities and avoid potential pitfalls.
  • Applying for Bankruptcy: In some cases, if the estate’s debts are substantial, the executor may need to apply to have the estate declared bankrupt. This would then trigger the bankruptcy process, with a trustee appointed to manage the distribution of assets to creditors.

Can I inherit debt from an insolvent estate in Australia?

You generally don’t inherit debt from an insolvent estate in Australia. When someone passes away, their estate becomes a separate legal entity responsible for paying off debts. This means their assets are used to cover what they owed, not your personal finances.  

However, there are a few exceptions to this rule. You might be responsible for the deceased’s debts if you were a joint borrower or co-signer on a loan, or if you guaranteed their debt.

In these specific cases, you would be legally obligated to pay the outstanding amount. If you’re inheriting assets, be aware that secured debts tied to those assets take priority. For instance, if you inherit a house with a mortgage, the creditor could sell the property to recover their debt. If you’re unsure about your potential liability, seeking legal advice is always a smart move.

How do I make a claim against an insolvent estate?

If you’re a creditor owed money by an insolvent estate, it’s essential to act promptly to lodge your claim. Here’s the process you generally need to follow:

  1. Notification: As soon as you become aware of the person’s death, notify the executor or administrator of the estate in writing. Provide details of the debt, including the amount owed, any supporting documents (like invoices or contracts), and your contact information.
  2. Proof of Debt Form: You’ll likely be asked to complete a Proof of Debt form, a legal document that formally outlines your claim against the estate. This form typically requires information about the debt, how it arose, and any supporting evidence you have.
  3. Submission: Submit your completed Proof of Debt form and any supporting documents to the executor or administrator within the specified timeframe. In many cases, there’s a deadline for submitting claims, so be sure to adhere to it.
  4. Verification: The executor or administrator will assess your claim and determine its validity. They may request further information or documentation if needed.
  5. Payment: If your claim is approved, you’ll be placed on the list of creditors. As the estate is insolvent, you’ll likely receive only a portion of what you’re owed, based on the funds available and the priority of your debt (as explained earlier).

Keep in mind that the exact process may vary slightly depending on the specific circumstances and the state or territory you’re located in.

What is the difference between an insolvent estate and a bankrupt estate in Australia?

FeatureInsolvent EstateBankrupt Estate
DeclarationDeclared by the executor/administrator or a creditor if debts outweigh assets at the time of deathDeclared by a court after a bankruptcy petition is filed, typically by the deceased person themselves before their passing or by a creditor
FocusDistribution of assets to creditors according to a specific order, followed by any remaining distribution to beneficiariesDistribution of assets to creditors according to bankruptcy law, with the aim of providing a fair and equitable outcome for all involved
Legal FrameworkPrimarily governed by state and territory probate and administration lawsGoverned by federal bankruptcy law
AdministrationUsually administered by the executor/administratorAdministered by a trustee appointed by the court
Impact on BeneficiariesBeneficiaries may receive little or nothing from the estateBeneficiaries may receive little or nothing, as most assets go towards paying creditors

Inheriting Debt?

When our client discovered that her deceased husband’s estate was insolvent, she was understandably worried about inheriting his debts.

At Walker Pender, we reassured her that heirs are generally not responsible for a deceased relative’s debts unless they co-signed for the debt or it’s stipulated in state law.

We thoroughly explained the legal protections available, ensuring she understood that she would not inherit the estate’s insolvency, thus alleviating her concerns and allowing her to focus on moving forward without the burden of these debts.

Need guidance on insolvent estates?

Facing an insolvent estate can be daunting, but you’re not alone. At Walker Pender, we specialise in guiding clients through these complex situations with expertise and compassion.

Contact us today to schedule a consultation and learn how we can help you navigate the challenges of an insolvent estate. Protect yourself and your future—let our skilled team provide the support and advice you need. Act now and take the first step towards confidently resolving your estate concerns.

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