Recovering a debt from someone who has died

It is sometimes the case that a person who owes you money dies before they have repaid the same to you. In this article, we explore what happens to the debt and the options available to creditors who are faced with a deceased debtor.

 

What happens to debt after death?

The deceased’s liability to repay a debt does not cease upon his or her death. Instead, liability for the same transfers to the deceased’s estate, providing that their estate is not insolvent.

 

What happens to debt if the estate is insolvent

If the deceased’s estate is insolvent, i.e. there are insufficient monies to discharge all debts in full, there is a legal order of priority by which any debts must be paid. Estate planning and further legal advice on a deceased's estate can be provided by our team of experts.

An insolvent estate can be administered in one of three ways:

1. By the deceased’s personal representatives;
2. Pursuant to an administration order; or
3. Pursuant to an insolvency administrator order.

Unlike solvent estates where the estate must be administered for the benefit of the beneficiaries, an insolvent estate must be administered for the benefit of the deceased’s creditors. 

Regardless of which of the above administration options are engaged, there is a specific order of priority in which debts must be paid as follows:

(i)              Secured creditors;

(ii)             Funeral expenses;

(iii)            Testamentary and administration expenses;

(iv)            Preferential creditors;

(v)             Unsecured creditors;

(vi)            Interest due on unsecured loans; and

(vii)           Deferred debts.

All debts in each category must be paid off before any debt in the next category can be paid. If, therefore, there were no monies remaining after payment of all secured creditors, then no other creditor would be entitled to receive their expenses or debt. If, however, there were insufficient funds to meet all debts within a particular category, then the pari passu principle would apply, and the assets would be apportioned among the creditors in proportion to the debts owed to each creditor, subject to specific provisions according to the category of debt which is beyond the scope of this article.

 

What happens to debt if the estate is solvent?

If the deceased’s estate is solvent, then a creditor should be able to recover full payment of its debt.  The executor(s) (if the deceased left a will) or the administrator(s) (if the deceased died intestate) (collectively referred to as personal representative(s)) are responsible for collecting in the deceased’s assets and settling his or her debts.

On discovering a deceased’s death, therefore, creditors should initially send a request for payment to the deceased’s personal representatives. Although it may be that payment of the debt will be delayed whilst the personal representative(s) collect in and sell the deceased’s assets, in most cases a full recovery should be possible. If, however, the personal representative(s) refuse to pay the debt, then the creditor can bring court proceedings against the personal representative(s) on behalf of the deceased’s estate to seek recovery of the same. As with collection of any other debt, creditors can include a claim for interest in respect of the unpaid sum together with costs.

 

How can a creditor find out if personal representative(s) have been appointed?

Depending on the value of the estate, personal representative(s) will usually have to apply to the probate registry for a grant of probate (or letters of administration) in order to administer a deceased’s estate. Searches can be carried out at the probate registry to see if a grant has been applied for or, if the deceased’s date of death is very recent so that the creditor can be notified once it is applied for.

 

What if the personal representative(s) fail to administer the estate?

If, having ascertained the identity of the personal representative(s) or the person(s) entitled to be appointed as personal representative(s) it becomes clear that they are not taking any active steps to administer the deceased’s estate, a creditor can issue an application at the probate registry inviting that person(s) to accept or refuse (renounce) the right to apply for a grant of probate. If all potential personal representative(s) renounce their right to apply for a grant, then the creditor can apply itself for a grant in a limited format allowing it to settle the debt from the deceased’s assets. Whilst any such grant would be limited, it nonetheless comes with an element of risk for the creditor if, for example, there was tax to be paid or the estate turned out to be an insolvent estate. Creditors would therefore be well advised to ensure that specialist legal advice is sought before making any application for a grant.

 

What if no personal representative(s) have been appointed?

If no personal representative(s) have been appointed, a creditor can still bring court proceedings, but it would be necessary in those circumstances for the creditor to seek an order from the court appointing someone to represent the deceased’s estate in the proceedings. Without such an order being appointed, the creditor would not be able to proceed with the proceedings as even if a judgment were obtained in their favour, there would be no person(s) against whom that judgment could be enforced.

Alternatively, a creditor can issue an application pursuant to Section 116 of the Senior Courts Act 1981 inviting the court to overlook those with the entitlement otherwise to take out the grant and appoint the creditor to act as the deceased’s personal representative(s). Such an application must be supported by evidence sufficient to satisfy the court that there are “special circumstances” making it “necessary and expedient” to appoint the creditor as the deceased’s personal representative(s).  As the likely basis for issuing the application would be the entitled person(s)’ failure to apply for a grant and/or take any steps to administer the estate, then pre-action correspondence with the entitled person would need to be undertaken setting out their duties to do so and making it clear if they do not do so within a specified period of time the creditors will make an application to court.

Such correspondence should include a clear warning to the person(s) so entitled to apply for the grant that if proceedings are issued, a claim for costs will be made against them. Such a warning is both necessary in order to ensure that the creditor complies with its own obligations to do so under the relevant pre-action protocol provisions of the Civil Procedure Rules 1998, but also as a means of providing some protection to the creditor as regards its costs in the event the application has to be issued. Both the determination of the application and the award of costs is discretionary in nature. It is possible therefore that the court may refuse to grant the application and/or to make an award of costs in the creditor’s favour. The issue of any such application should therefore be considered carefully and always only undertaken as a last resort.

 

The next steps to collect a debt after death

Whilst a creditor’s entitlement to seek to recover payment of a debt does not die with a deceased, collection of the same following a debtor’s death can often be fraught with difficulties. Creditors would therefore be well advised to seek specialist legal advice as regards collection of a debt before taking any steps beyond initial correspondence with the personal representative(s) seeking recovery of the same.

If you are a creditor and have a debt outstanding from a deceased’s debtor and would like to receive legal advice in relation to the same, please contact our specialist probate disputes lawyers on [email protected].