What happens to debt when a person dies?
It is a common misconception that when a person dies, their debts are automatically cleared. Unless an insurance policy is in place to discharge debts then they must be paid from the estate. Where there are insufficient assets to meet all the debts, the estate is insolvent. To a large extent, the administration is dealt with as a normal bankruptcy. Sole traders should be aware that the business-related debts still have to be paid out of the estate on their death. Company directors have the protection of limited liability, however, if they are owed the company a director’s loan, this will have to be repaid out of the estate.
In one case, it was understood that the deceased’s estate was solvent with adequate assets to meet the liabilities and then allow the remainder to be distributed in accordance with the will. However, the deceased had been a director of a limited company to which he owed a significant amount of money. Liquidators were appointed to the company and pursued a claim against the estate of the director. We were appointed trustee in bankruptcy of the insolvent estate. Initial expectations for creditors were 65p in the £. With the efficient realisation of the estate coupled with the robust challenge of creditors claims, we were able to return 100p in the £ to creditors.
We acted in another case where the deceased had operated a sole trading business. Following his death, it was initially thought that his estate was solvent where there would be an inheritance available for beneficiaries. However, it quickly became apparent that his business debts were significant and, as he was a sole trader, these fell to be met by his estate where there were insufficient assets to do so. This meant that the estate of the deceased was insolvent and we were appointed. We took steps to wind up the sole trading business which was fairly sizeable with a number of employees, assets and trading debts. We also successfully challenged the transfer of an asset for the benefit of creditors. 19p in the £ was returned to creditors.
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If you have any questions or concerns about debt, a member of or Business Recovery and Insolvency team will be happy to assist you to assess your position.