If a bankrupt person dies, all assets available from their estate are divided equally among their creditors. A bankrupt deceased estate in New South Wales can be administered either by the NSW Probate and Administration Act 1898 or the federal Bankruptcy Act 1966.

Bankruptcy Act 1966 (Cth)

Under this Act, a creditor who is owed $5000 or more can apply to the court for an order for the administration of a bankrupt deceased estate. Such an order can be made only by the Federal Circuit and Family Court of Australia (FCFCOA) or the Federal Court of Australia. For an order to be made, the debtor must have satisfied one of the residency requirements under the Act. These are that, at the date of their death, the debtor:

1. was carrying on a business in Australia, personally or via an agent; or
2. was present or ordinarily resident in Australia; or
3. had a home or business in Australia; or
4. was a member of a partnership carrying on a business in Australia as a partner or via an agent or manager.

An application should be verified by an affidavit, and can be made only if the debt is a liquidated sum (a fixed figure) and is payable immediately or at a certain future time.

A legal representative of the deceased person has 28 days from the date of the order to provide the Official Receiver (a public official or body appointed to help administer the estate) with a statement of the deceased’s person’s affairs.

First expenses paid as a priority from the bankrupt deceased estate are the funeral, administration and testamentary expenses. The rest of the debts are paid according to the rules of priority set out in the Act. A creditor of a deceased estate should be aware of the priority of payment of debts owed by the estate.

Some assets may be immune from the bankrupt deceased estate and therefore able to be passed to a beneficiary. As any life insurance policies and the deceased’s superannuation will not form part of the estate they generally cannot be used to pay the deceased’s debts.

If all debts have been paid in full, the order for administration of the estate is annulled and the Official Receiver is provide with a certificate stating this. If the value of the assets in the deceased estate is insufficient to pay off all debts, unpaid debts will die with the person. If a debt was a joint debt or was guaranteed by someone, it automatically passes to the surviving co-owner or guarantor.

Probate and Administration Act 1898 (NSW)

Under this Act, upon the grant of probate or administration, all property belonging to the deceased person vests in the executor or administrator.

Unlike the Bankruptcy Act, this Act allows the court to make a special order, on application by the administrator or executor. The order can direct the:

1. time and mode of sale of any real estate;
2. letting and management of any real estate until sale;
3. sale of shares or income from shares be applied to the maintenance or advancement of infants; and
4. the expedience and mode of dividing real estate if an application is made for this.

The court must generally administer real estate “for the greatest advantage of all persons interested”.

If a bankrupt person dies intestate (without a will), their bankrupt deceased estate vests in the NSW Trustee and Guardian. The estate is then distributed in accordance with the Succession Act 2006. The court can grant administration to the deceased person’s spouse, one or more of the next of kin, or one or more of the next of kin jointly with the spouse. If this is not possible, the court can grant administration to any person the court thinks fit, whether or not a creditor of the deceased.

Bankruptcy after death

A person can be made bankrupt even after they die. For bankrupt deceased estates with few or no assets to distribute to creditors, the Succession Act may be the best approach. Creditors could be notified of the situation and requested to write off their debts. In more complex cases, the Bankruptcy Act may be a better option for reasons such as:

1. pressure on the executor is relieved because an independent trustee is appointed to administer the estate;
2. recoveries from undervalued transactions, transfers to defeat creditors, and preferential payments may be possible under the Bankruptcy Act; and
3. creditors may prefer an independent trustee.

The process for a deceased person to become bankrupt is the same as for a living person: either by a creditor applying to the court to bankrupt the deceased person or voluntarily through the executor applying to the court.

The administration of the bankrupt estate is similar to normal bankruptcy in that the trustee has the same powers and obligations. The challenge in bankrupt deceased estates is that, being deceased, the debtor cannot help the trustee perform their role by providing records or documents, or completing documents.

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