When you are affected by the death of a friend or a loved one, it is a stressing time in everyone's life. When the death is compounded by the deceased being insolvent when they pass away, it causes even more problems. The family is left to deal with the deceased's insolvent estate, and sometimes there is nothing left for the family to inherit when the estate is completely settled.
Even if the deceased has a will that distributes their personal property and belongings to the family, an insolvent estate overrides the will. The deceased's creditors will receive any money that is made from the sale of the estate property and then if anything is left it will be distributed to the family as per the request of the will. Prior to the creditors getting any money, the cost of the funeral and burial will be taken care of so that the family is not left with the worry of having to pay for that.
This division of assets and property to the creditors is carried out under the Administration of Insolvent Estates of Deceased Persons Order 1986 and Section 421 Insolvency Act 1986. If the person was made bankrupt before they passed away but the bankruptcy order was not completed, the trustee or official receiver has the right to continue dealing with the bankruptcy as if the deceased was still living. But once again, all of the funeral costs and burial arrangements will be taken care of with the assets the official receiver or trustee has at their disposal.
Up until 2000, the surviving spouse would inherit the property left by the deceased. That changed with the Insolvency Act of 2000 to state that the property is to be added to the deceased's assets under the bankruptcy in order to pay off the debt that is outstanding. The official receiver can apply to the courts to reclaim the deceased's share of the property, and if the surviving spouse does not have the funds to buy out the official receiver's claim then the home must be sold. The official receiver can obtain this order up to five years after the date of the death of the deceased.
The family can request an Informal Administration so that the debts are dealt with on an informal basis instead of through the bankruptcy system. This means that the family members take charge of settling the deceased's debt and they sell the assets and pay off the creditors on behalf of the deceased. When this is done, there is no need for an insolvency administration order and it is carried out by the representative the deceased appointed before passing away.
Whatever you do, do not panic if you discover that your loved one was in debt when they died. You are not responsible for their debts and you do not have to pay them. However, if the deceased gave you all of the money and assets prior to their death, the courts may ask you to return it to them so that the creditors can be paid off. The only time you are liable for the deceased's debts is when you have signed guarantees to pay for their care or credit preceding their death. Otherwise you are not liable for the debt. If you believe that there are debts left outstanding when you are sorting out the estate, contact a solicitor for advice before distributing property and assets to relatives per the deceased's will.