Insolvent Estates

At times, the responsibility of being an executor can feel like an almost impossible and overwhelming task. It’s hard enough discovering all the assets  of the estate to realise them for the benefit of the beneficiaries, but what do you do if there isn’t enough money in the estate to cover the liabilities? Read on to find out the rules governing insolvent estates and then contact Streeterlaw (estates@streeterlaw.com.au) to guide you on your journey.

It is helpful to know that as an executor, you have a fiduciary obligation to ensure the estate is properly administered which includes that all debts and liabilities of the estate are paid, and assets are free to be dealt with. The Probate and Administration Act 1898 (NSW) governs the way in which estates are administered. Schedule 3 part 1 of the Act outlines the rules which must be followed where an estate is insolvent. Specifically, the following rules apply to payment of debts and liabilities of an insolvent estate:

1. Funeral, testamentary and administration expenses have first priority.
2. If there are any assets left over, the law of bankruptcy will govern the respective rights of any secured and unsecured creditors as to debts and liabilities that are provable and priorities of the debts and liabilities in force at the date of death.

A secured creditor will have greater rights than an unsecured creditor to receive payment. The Bankruptcy Act 1966 (Cth) provides that where an insolvent debtor dies leaving insufficient assets to pay their debts, any creditor owed more than the statutory minimum, currently $10,000, or the person administering the estate, may seek an order for the administration of the estate in bankruptcy. After all the assets have been realised, any debts left unpaid will die with the person unless they are jointly held with another person or guaranteed with another person, in which case the debts automatically pass to the surviving person.

It is important to note the value of the debts of the estate and if they are secured. For example, an unsecured debt to a friend owed $3,000 by the deceased is not above the statutory minimum and so a bankruptcy notice cannot be issued. However, property secured by a mortgage will need to be sold to meet the repayment of the secured creditor. Slightly different rules apply to insurance policies, superannuation benefits and damages for person injury as to whether these amounts are available to creditors.

Each estate is unique and presents its individual challenges. If you are unsure as to the financial position of the estate or suspect it may be insolvent, contact Streeterlaw now on (02) 8197 0105 to discuss the specific circumstances of your estate with one of our experienced team members to ensure your peace of mind as they assist you navigate your role of executor.

Written by Tamara Stevanovic

Tamara studied a combined degree in Law and Commerce at Macquarie University. She attained her Graduate Diploma of Legal Practice from the College of Law in 2021 and is currently undertaking her Masters of Law in Commercial Litigation. Tamara is passionate in taking a commercial approach to resolving all disputes in both commercial litigation and estate litigation matters and is a valuable asset to the Streeterlaw team

Call us on 02 8197 0105 to book an appointment with Tamara Stevanovic!