31 May 2020

Deceased estates can be subject to the Bankruptcy Act


5 min

How family members/executors and creditors can solve debt matters.

Sadly, even the estates of the dearly departed are not always free of debt. In some very sad cases, it was those debts that resulted in their death, the shame was too much for them to bear.

Regularly, when a person is dealing with debt, it creates many physiological issues and can be the cause of family disunity. This is where bankruptcy can assist. It can bring at least one major problem to an end. One main purpose of the Bankruptcy Act 1966 is to give a person relief from most debts, though it can also impose penalties in certain limited circumstances. So, if debt is seemingly getting on top of a person, we recommend they reach out for help before their debt becomes too much for them to bear. Bankruptcy is not the end of the world, subject to some conditions it only lasts three years, and during that time life operates as normal and people can earn as much income as they can. There are of course some restrictions and requirements; for example, bankrupts may be required to contribute part of their income to their estate in view of indexed amounts[1] for the benefit of creditors.Deceased estates

When those same debt problems continue in a deceased estate with insufficient assets to pay its creditors, we find that some creditors start chasing family members for payment. In some cases, they try to convince the family that not only are they responsible for burying their loved ones, they are also responsible for paying their debts—when they are not. Critically, in many cases a person’s superannuation fund may not be an asset of the deceased estate.

The bankruptcy of a deceased estate operates to provide relief for those family members so they don’t have to deal with those creditors. It also enables creditors to write-off their debts (part or in full, in view of any dividends available) for tax purposes. To initiate this process, a bankruptcy trustee is appointed to the deceased estate. A creditor or the deceased estate’s executor/administrator can apply to court under Part XI (part 11) of the Bankruptcy Act. In fact, we note that in our Worrells Insolvency Report 2020, a bankruptcy trustee was appointed to 20 deceased estates in the 2018-19 financial year.

Section 245 of the Bankruptcy Act allows creditors to apply to bankrupt a deceased estate. Interestingly, if a debtor dies after a creditor files for their bankruptcy, but before the application is heard, the court can 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 deceased 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), it must be decided who has the right to administer the estate before they can apply for the appropriate order to bankrupt the estate.

A bankrupt deceased estate is administered along the same lines as the 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 person’s income leading to ‘income contributions’. Any income derived from the estate’s assets is automatically an asset of the estate.

Otherwise, practically all asset recoveries, void transactions, funds distribution, and fee approval provisions apply, as they would in any other bankrupt estate.

Another scenario is when a person dies during their period of bankruptcy. If they died after the sequestration order is made, or after their debtor’s petition is accepted, the estate is conducted as normal; it is not considered a bankrupt deceased estate. But, as mentioned above, there is little difference in running the estates in any event.

In a wild extreme, which I’ve never seen happen, a bankrupt could die during their bankruptcy, and their deceased estate is also insolvent due to post-bankruptcy debts. This scenario could lead to a subsequent bankruptcy of the deceased estate that runs concurrently with the first bankruptcy.

People administering insolvent deceased estates must be aware that, not only can creditors apply for a bankruptcy trustee to be appointed to the estate, they too can apply to have the estate wound up under the Bankruptcy Act.

Worrells has more registered bankruptcy trustees than any other private insolvency firm in Australia. Contact your local partner for a complimentary, obligation-free discussion to get the right solution to individual circumstances.

Related article: Income contributions in bankruptcy

For help and support:

Beyond Blue

[1] The Australian Financial Security Authority (AFSA) releases indexed amounts relating to income after tax and number of dependants.

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