Deceased estates refers to the assets and liabilities of a person who has passed away. When someone dies, their estate must go through a legal and financial process to distribute their assets to beneficiaries and pay any debts.

What is an insolvent estate?

Insolvent estates occur when the assets from a deceased estate are insufficient to pay out the liabilities and expenses, and money is owed to the creditors. A creditor is a company or person who is owed money or a debt. The administrator/executor or the legal personal representative (LPR) is responsible for administering the deceased estate. These cases are managed differently from regular estates, with laws governing the priority and order in which a creditor is paid.

Administering an Insolvent deceased estate

The LPR administering the estate can choose how to proceed. Insolvent deceased estates in NSW are managed under the Probate and Administration Act 1898 (NSW) or the Bankruptcy Act 1966 (Cth)

The person administering the deceased person’s estate will need to apply to the court and distribute the estate as per the jurisdiction and priority set out in the NSW administration laws.

The Bankruptcy Act

The Bankruptcy Act 1966 (Part XI) allows the Federal Circuit Court to appoint a bankruptcy trustee to administer an insolvent deceased estate.

The administrator of deceased estate can apply to the Federal Court for an administrator’s petition Order to make the estate bankrupt. The administrator may also be required to submit an affidavit, a statement of affairs, and prove that the deceased met the Australian connection requirements.

A bankruptcy trustee is appointed, assets are liquidated and are distributed to creditors in order of priority.

Two or more creditors can apply for a creditor’s petition in some circumstances if the deceased debtor owes a creditor at least $10 000. The bankruptcy regulations require the creditor to give the official receiver a copy of the administration order. The bankruptcy is then registered on the National Personal Insolvency Index.

If the deceased person was already bankrupt on their death, the bankrupt estate administration may continue to be dealt with by the official receiver.

Bankruptcy rules on death

Debts are not discharged automatically when someone dies: all liabilities in the deceased’s sole name will have to be repaid from the estate.

When a person dies and leaves an insolvent estate, bankruptcy rules are applied when paying a creditor. Under the Bankruptcy Act, the administration of an estate is managed in a similar way to management of property of a living bankrupt. The executor or administrator must follow a specific order of priority; otherwise, they may be personally liable for mishandled money.

When dealing with insolvent estates, the priority matters. Creditors can be secured, preferential or unsecured.

The order of priority for payments is:

1. Secured creditor;
2. Funeral expenses;
3. Testamentary and administrative expenses;
4. Preferential creditor;
5. Unsecured creditors;
6. Interest on unsecured loans;
7. Other debts;

Inheriting personal debt – what is your liability?

As a beneficiary of a solvent estate, the assets must first be used to pay any outstanding debts. If there is a surplus, then distribution to beneficiaries can occur.

However, if the estate is insolvent and there are insufficient assets to cover all the debts, a person does not inherit the deceased person’s debt unless:-

1. the debts are held jointly, or
2. someone has guaranteed payment of the deceased person’s debt.

Whilst debts are not inherited by family members, there are two exceptions to the rule:

1. If the deceased’s loans had a third party guarantee, then the third party would be liable; and
2. If the deceased gifted money within seven years before death, it may be considered avoidance of paying creditors

What about life insurance and superannuation?

Certain assets of a deceased estate are preserved and not available for the creditors. Life insurance policy proceeds are not allowed to be used to pay estate debts unless:

1. They are funeral or testamentary expenses; or
2. the Will of the deceased or previous contractual agreements directs otherwise.

If the deceased held superannuation benefits and life insurance funds, the payments are distributed as per:

1. the nominations in the policy; or
2. the deceased’s will directive, or;
3. intestacy laws.

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