30 Sep 2015

Bankruptcy and Deceased Estates


3 min

Insolvent deceased estates may still be subject to the Bankruptcy Act.

Recently we have had several enquiries about insolvent deceased estates and what needs to be done to properly wind up the estate’s affairs.

Deceased estates can be insolvent. Just the same as a company or living person, there may be insufficient money or assets in the estate to meet the deceased’s debts.

Winding up a deceased estate’s affairs is done by appointing a bankruptcy trustee to the estate. This may be done by a creditor or by the executor or administrator of the deceased estate by applying to court.

Section 244 of the Bankruptcy Act 1966 allows creditors to apply to bankrupt a deceased estate. Interestingly, if a debtor dies after the filing of an application for their bankruptcy but before the application is heard, the court may make the sequestration order as if it were an application to bankrupt a deceased estate.

Section 247 of the Bankruptcy Act allows the person administering the estate to apply to appoint a bankruptcy trustee when they conclude that the estate is insolvent.

This also throws into light the benefit of having a Will. If a person dies ‘intestate’ (i.e. without making a will), a decision must be made about who has the right to administer the estate before that person can apply for the appropriate order to bankrupt the estate.

The handling of a bankrupt deceased estate will be along the same lines as a bankrupt estate of a living person, with some obvious exceptions. The two major exceptions are:

  1. There will be no discharge from bankruptcy.

  2. There will be no assessment of personal income leading to ‘income contributions’. Any income derived from the estate’s assets is automatically an asset of the estate.

Otherwise, practically all of the asset recovery, void transaction, funds distribution, and fee approval provisions apply, as they would in any other bankrupt estate.

Occasionally, a bankrupt dies during the period of their bankruptcy. As long as they died after the sequestration order is made, or after their debtors’ petition is accepted, the estate will be conducted as normal; it is not considered a bankrupt deceased estate under Part XI of the Bankruptcy Act. But, as mentioned above, there is little difference in running the estates in any event.

In a wild extreme, and one that I have never seen happen, a bankrupt could die during the period of their bankruptcy, and their deceased estate also be insolvent due to post-bankruptcy debts. This could lead to a subsequent bankruptcy of the Part XI deceased estate that runs concurrently with the first bankruptcy.

People administering deceased estates that are insolvent need to be aware that, not only can a creditor apply for a bankruptcy trustee to be appointed to the estate; they can apply to have the estate wound up.

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