Bankrupt Estates

Date: May 02, 2010
Document Type: Newsletter

The most popular warning of wills and estates law is to always have a will. It appears that only two options are available: intestate or testate. But even having a valid will can bring about a new option in dealing with an estate if a deceased had more debts than assets, it is necessary that the estate is treated differently than from a normal administration by virtue of the Probate and Administration Act 1898 (NSW).

Circumstances of Insolvency

Generally, if a deceased had more debts than assets, the estate will be treated differently than from a typical administration. This is especially true where the deceased has property out of which some of the debts could be paid.

There are certain ways in which a bankrupt estate may be administered:

Trustee in Bankruptcy

The estate may be made bankrupt in the same way as a living debtor is made bankrupt. The estate is then administered by an Official Trustee in Bankruptcy or other appointed trustee, for example a liquidator. The appointed trustee replaces the bankrupt proprietor. Generally, the executor or administrator does not play any part of the administration of the estate if conducted by a trustee.


The executor may also administer the estate by following the provisions of the Probate and Administration Act 1898.


If the estate is made bankrupt, this may improve the position of an unsecured creditor against the estate because the recovery of any preferential payments may increase the size of the estate. Creditors will have to wait until the assets of the estate are available to the executor or administrator (after the grant of probate or letters of administration) before they receive payment.

Secured creditors have special rights over goods or land belonging to the debtor and are paid before unsecure creditors. For example, a bank with a mortgage over property will be paid out before.

Funeral costs are an estate debt that is entitled to be paid out [see below preserving assets]. The person who orders the funeral is responsible for paying the account but is entitled to reimbursement from the estate ahead of other creditors.

Preserving Assets

Another possible scenario for a bankrupt estate is preserving the proceeds of the deceased's assets from the payment of outstanding debts.

Unless an expressed contrary intention is set out in the deceased's will, the proceeds for any life insurance policy are not to be used for payment of estate debts except for funeral or testamentary expenses (the cost of administering a will). It may be distributed by the executor according to the will or the intestacy rules found in s 205 of the Life Insurance Act 1995 (Cth).

Superannuation benefits under some government funds are protected by legislation and the protection cannot be revoked by a will.

Legal Action

If the value of the estate is not sufficient to pay off debts, the debts will die with the person unless they were held jointly with someone (for example, a mortgage on a property) or guaranteed by someone else. In these cases, the debts will automatically pass to the surviving co-owner or guarantor.

Wills and estates law is very complicated. Do not rest on your laurels thinking just because you have a valid will, it absolves all problems after death. It is highly recommended to speak with a legal professional on all options, present circumstances and possible future scenarios that could affect your estate after death.

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