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What Happens to Debts of a Deceased Estate?

The executor or administrator of a deceased estate will have the duty to deal with the deceased’s debts and pay them where possible from the deceased’s assets. The remainder of the estate after the payment of these debts will be distributed to the deceased’s beneficiaries.

Some estates, however, have more debt than there are assets. So, what happens if this is the case?

Can a Deceased Estate Become Bankrupt?

It is common knowledge that if a person can no longer afford to pay their debts, a creditor can apply to bankrupt the person or the person can voluntarily become bankrupt. A person who has been bankrupt will be released from their debts and a Bankruptcy Trustee will be appointed to realise any available assets to repay the bankrupt’s creditors.

More information on what happens in a bankruptcy can be found here.

If person was bankrupt when they died, the estate will continue to be administered as a bankrupt estate. The procedure in administering a bankrupt’s affairs and a bankrupt estate’s affairs are largely similar. The assets of the bankrupt estate will be realised for the benefit of its creditors, with some differences, including:

  • Superannuation death benefits and life insurance benefits will not form part of the estate and therefore will not be used to repay its creditors;
  • There will be no assessment of income by the Bankruptcy Trustee and will not have income contributions; and
  • There will be no discharge from bankruptcy, but the Trustee will finalise the administration once the estate has been administered. 

Administrators or Executors Can Apply to Bankrupt the Estate

If you are the executor or administrator of the estate, the Bankruptcy Act allows you to apply to appoint a Bankruptcy Trustee over the estate if it is insolvent. However, to do this you need to make an application to Court and you cannot voluntarily appoint a Bankruptcy Trustee without a Court Order.

The procedure again is largely similar to the bankruptcy of a living person, with the exceptions discussed above.

Family Members Won’t Be Liable for Insolvent Estate’s Debts

Importantly, family members of the deceased will generally not be personally liable for the deceased’s debt, even if the deceased’s estate is insolvent. There are certain exceptions to this:

  • The family member may have signed a joint guarantee with the deceased, or have personally guaranteed the deceased’s debt;
  • The family member may own a property which has been used to secure a debt by the deceased; and
  • The family member incurred the debt jointly with the deceased.

Contact Us For Assistance

If you are an executor or administrator of an insolvent estate, we can help you navigate the legal processes involved in administering an insolvent estate. Please contact our Brisbane or Gold Coast offices for a free, no-obligation consultation.

GET IN TOUCH

We’re happy to answer any questions you may have, so please don’t hesitate to call us and schedule a consultation.

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Bundall Qld 4217

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