Bankrupt Deceased Estates

On occasion, an executor may find themselves in the unenviable position of discovering that the recently deceased simply does not have sufficient assets to pay off all of their debts. This can be for a number of reasons – from the debts of the deceased when they died to mounting estate expenses (especially in situations where there is continuing litigation regarding the deceased’s estate).

This can lead to creditors pursuing bereaved family members for payment of the deceased’s debts, even to creditors claiming that those family members are responsible for the debts that have been left behind (which they generally are not) or even pursuing assets that may fall outside of the deceased’s estate (such as superannuation).

In such situations, it can come as a relief for all parties that it is possible to bankrupt a deceased estate.

Who can bankrupt an estate?

Either a creditor or the legal personal representative of the estate (the executor or administrator of the deceased estate) can apply to the Court under Part XI of the Bankruptcy Act 1966 (Cth) (“the Act”) to do so.

It is section 245 of the Act that empowers creditors to apply to the Court to bankrupt a deceased estate, with section 247 of the Act giving legal personal representatives the same power.

This also highlights the importance of having a Will. If a person dies intestate (without a Will in place), it must then be established who has the right to administer the estate and this person must generally get a grant of Letters of Administration (an order from the Court giving them the authority to administer the estate) before they can apply to bankrupt the estate.

What if a person dies during their bankruptcy?

This is a rare occurrence, but people have been known to pass away during their bankruptcy. What occurs will generally depend on the stage of bankruptcy they were in when they died.

If a person dies after the sequestration order is made or their debtor’s petition is accepted, their estate is not considered a bankrupt deceased estate and it is administered as normal. However, if a person dies prior to this, their estate can be bankrupted under Part XI of the Act.

How is the bankrupt estate administered?

The administration of a bankrupt deceased estate is very similar to the administration of a living bankrupt person. However, unlike a living bankrupt person, there is no discharge from bankruptcy for the deceased estate, nor will any income of the estate lead to “income contributions”. Any income derived from the estate’s assets is automatically an asset of the estate. Apart from this, almost all other asset recovery provisions apply to a bankrupt estate.

Conclusion

It is important to keep in mind that deceased estates can be bankrupted by either the estate’s creditors or the estate’s representatives, especially when people administering estates begin to realise that the debts may outweigh the estate’s assets.

If you are administering a deceased estate and are worried about its solvency, or if you are a creditor who wishes to bankrupt a deceased estate, the experienced team at Bell Legal Group can discuss your options and advise and assist you with this process.

 

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For further information and assistance on any estate planning or estate administration matter, please contact a member of our experienced Wills, Trusts and Estate Planning Team at Bell Legal Group on (07) 5597 3366 or email law@belllegal.com.au.

 

This article was prepared by Josephine Vernon, solicitor. It is for information only and is not legal advice.