Losing a loved one is difficult enough without having to worry about debts, bankruptcy or legal processes.
The good news is that the law in England and Wales sets out clear rules about what happens if someone who is bankrupt – or facing bankruptcy – dies, and those rules are designed to bring certainty at a stressful time.
Our Personal Insolvency lawyers explore how the process works and what it means for families and personal representatives.
Legal background
Bankruptcy begins when a court makes a bankruptcy order, either following an application by the individual themselves or a petition by a creditor.
Once that order is made, the person’s assets form a bankruptcy estate, which is managed by a trustee in bankruptcy under the Insolvency Act 1986 (IA 1986) and the Insolvency (England and Wales) Rules 2016 (IR 2016).
If someone dies insolvent (in other words, their estate does not have enough assets to pay all debts), special rules apply under the Administration of Insolvent Estates of Deceased Persons Order 1986.
These rules adapt the usual bankruptcy process to deal with a deceased person’s estate and also apply where someone dies after a bankruptcy application or petition has been made, but before the court has made a bankruptcy order.
If the debtor dies before bankruptcy
A bankruptcy application or petition does not automatically come to an end if the person dies.
If the person dies before the petition has been formally served, the court can allow it to be served on the personal representatives (PR) (usually the executors or administrators) or another appropriate person.
If the court decides the bankruptcy should proceed, it can still make a bankruptcy order after death.
If no bankruptcy proceedings have started at all, creditors still have options.
They may:
- Apply for an Insolvency Administration Order, which applies a modified bankruptcy-style process to the estate; or
- Allow the PRs to obtain a grant of probate and then administer the estate in line with bankruptcy principles.
If the debtor dies during bankruptcy
Death does not affect the bankruptcy process.
The trustee in bankruptcy continues to administer the estate, which remains vested in them.
The statutory order of debt payment remains unchanged except that reasonable funeral costs and the expenses of administering the estate are paid ahead of most creditors (save for secured creditors).
If, after all debts and costs are paid, there is any money left over, that surplus passes to the PRs to be distributed under the Will or, if there is no Will, under the intestacy rules.
Who does what?
The trustee in bankruptcy is responsible for:
- Securing and selling assets in the bankruptcy estate;
- Gathering information about the deceased’s finances (with help from the PRs);
- Investigating transactions made before bankruptcy (for example, whether some creditors were unfairly paid ahead of others);
- Deciding which creditor claims are valid and paying them in the correct legal order; and
- Completing the necessary administrative steps, including recording the death on insolvency registers and closing the case.
PRs play a key supporting role. They must:
- Act as the trustee in bankruptcy’s main point of contact;
- Provide information and documents about the deceased’s assets and liabilities;
- Hand over property that belongs to the bankruptcy estate; and
- Respond promptly to enquiries.
If the PRs are administering the estate themselves (rather than the trustee in bankruptcy), they must still follow the insolvency rules when paying creditors.
Getting this wrong can, in some cases, lead to personal liability, which is why professional advice is so important.
Clear communication between trustees in bankruptcy and PRs is essential, as some assets may fall outside the bankruptcy estate and need to be dealt with separately.
Practical considerations
- For trustees in bankruptcy: acting quickly to secure assets is crucial, as is identifying jointly owned property, reserving funds for funeral and administration costs, and dealing sensitively with bereaved families while fulfilling legal duties.
- For PRs: if there is any doubt about whether the estate is solvent, early advice from an insolvency specialist can prevent costly mistakes and unnecessary stress.
Next steps
If someone who is bankrupt – or facing bankruptcy – dies, the situation can feel overwhelming, but established legal rules apply.
Family members are not personally responsible for the deceased’s debts, unless they were jointly liable for them.
As the interaction between insolvency and estate administration can be complex, early advice from experienced insolvency lawyers and insolvency practitioners is strongly recommended.
Contact our Personal Insolvency team today for clear, practical advice on dealing with bankruptcy issues following a death.
0161 941 4000
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Vicky Biggs
Legal Director
Vicky is a Legal Director in the Insolvency and Restructuring team at Myerson and has been with the firm since 2012. Utilising her commercial litigation experience, Vicky now specialises in contentious insolvency matters, advising insolvency practitioners, directors and individuals in relation to both corporate and personal insolvency issues.
Vicky advises on a wide range of insolvency matters, including claims made by administrators, liquidators and trustees in bankruptcy, director disqualification proceedings, remuneration approval applications, retention of title claims, validation orders, bankruptcy annulment applications and winding-up and bankruptcy petitions.
About Vicky Biggs