Deceased Insolvents + Dead Bankrupts
Dying with outstanding debts does not avoid the possibility of being made Bankrupt
Many people think that when you die, your debts die with you (except for IHT), but take note, they don’t, debts survive, in fact the debt survives until it is settled (or statute barring applies, whichever is the sooner). There is no more or less ability to escape debt when you die than there is when you are alive. There is no additional mechanism for obtaining debt forgiveness (also known as a debt write off or compromise), and transactions entered into prior to or on death can be overturned.
This may sound terrible, but if you are owed money then whilst you can be sympathetic of the surviving family or spouse’s position, you still want to be paid and with a Trustee in Bankruptcy having the ability to overturn transactions entered into by the Deceased individual up to 5 years ago, the drastic step of making a dead person bankrupt is a measure some creditors will take.
This post is to provide general guidance to both those surviving the death of an individual in debt and Executors of wills.
Surviving spouse/family or beneficiary of a deceased person
As painful as it is to think about your own demise or that of a loved one or friend, it is imperative the affairs of anyone in debt are put in order order before that unfortunate day arrives otherwise there is simply a messy situation left behind for those closest to the deceased person to watch unfold, and the possible impacts are far reaching if someone takes the step of applying for a Deceased Insolvent Administration Order (otherwise known as Bankruptcy). The affairs of the deceased person can be torn and family assets and heirlooms sold from underneath loved ones with no way of stopping it – the stress and upset it causes those who are left can be horrendous.
By the way, you are right, I did say it was possible to make a dead person bankrupt. When this happens the Trustee in Bankruptcy will take the same action he/she could have done when the person was alive, and that means transfers that the deceased made before he/she passed away can be overturned and children/grandchildren can find themselves being forced to repay money or sell assets.
Even if the deceased had a will transferring their assets an Insolvent Administration Order overrules it.
An Insolvent Administration Order also overrules Survivorship – the principle where on death the deceased’s share in in a property (e.g. a family home) owned as joint tenants is transferred to the surviving tenant at no cost to the survivor. Therefore the value of the transfer must be paid to the estate or ultimately the property could be sold to recover the value that was lost.
The prospect of this happening you would think is never, but we have worked on several matters where this has happened, sadly in some cases it is where husband hasn’t told wife about the full extent of his business affairs or has simply forgotten about that personal guarantee he signed years ago, but it could simply be from credit card debts that have accrued from living costs. One other case we have been involved in is where a disputed court case was settled after his death and wife refused to ‘reach a commercial settlement by releasing the equity from her husband’s share of the property she received on his death’, so the creditor had no choice but to make the deceased husband bankrupt and it ultimately saw the marital home sold.
We have worked with both a variety of individuals, both old and young to get their affairs into order before this happens, along with a variety of creditors owed money by deceased individuals to ensure they are appropriately recompensed in relation to their debt. We are specialists in dealing with debt and managing the delicate balance between the interests of creditors and debtors or surviving family members.
When it comes to dividing up the assets of a bankrupt the debts must be paid from the assets before the remainder is split between relatives. Where it isn’t, an Insolvent Administration Order will overturn those transactions. Very few executors of wills know this fact and very few executors know that personal liability can attach to those transfers where they have not made sure everything has been dealt with properly and/or that the deceased isn’t bankrupt at the time any transfers are made.
Executors of Wills
When you die somebody else has to deal with your estate – an Executor or Personal Representative (we will call them Executors for the rest of the article). Thanks to a court case many years ago they also have to deal with your debt issues, and if they fail to do so they could find themselves personally liable for any disposal of assets or cash from the Deceased Insolvent’s estate, including any fees of the Executors.
It is imperative that Executors establish very early on whether or not the Deceased’s estate is insolvent and if it is they take one of 3 courses of action:
- Administer the estate out of court using the principles laid down in the Insolvency Act – however, given this includes challenging previous transactions up to 5 years before death that the Executor can only do by request, this is likely to place far too much risk and reliance on luck at the Executor’s door;
- Administer the estate with the Courts Directions – whilst this provides a safety net to the Executors, it doesn’t stop them being responsible for the accuracy of all information and still doesn’t provide a mechanism similar to those available to a Trustee in Bankruptcy and therefore personal liability is still a risk;
- Apply for an Insolvency Administration Order – in essence a bankruptcy petition for someone who has died. The estate will be taken over by a Trustee in Bankruptcy and a process identical to a typical Bankruptcy will ensue.
We understand that both debt and death are very emotional subjects, but by not tidying up someone’s affairs before death it creates an incredibly difficult situation that it is far from ideal for all concerned. Never forget, debt doesn’t die just because a debtor does.
Whether you are tidying up your own affairs, having to deal with someone else’s affairs, dealing with the financial aspects of someone who has passed away or simply want to recover a debt you are owed, Contact us today for guidance and a solution – 0330 900 2000