Coping with the loss of a loved one is one of the hardest challenges many of us face.

Trying to figure out what happens next can cause great stress, especially if the person was bankrupt.

How can an estate be bankrupt?

An estate has its own legal status similar to a person and can, therefore, be declared bankrupt if it is unable to pay its debts. This can also happen where a person dies in the process of being bankrupt.

Who is liable for the debts?

Family members cannot be held liable for the debts of the deceased unless:

  1. the debt was secured;
  2. the debt was jointly incurred (i.e. the family member also co-borrowed); or
  3. the family member personally guaranteed the debt.

An executor of an estate is liable to pay off all debts owing by the deceased. These debts are paid out of the deceased’s estate. However, where someone dies and there are not enough assets in their estate to pay their creditors, an executor is protected from liability of a deceased’s debts if the debts were incurred before the course of administering the estate.

So, what happens next?

A bankrupt estate can be dealt with either under State Law (Queensland) or Federal Law, both of which have different procedures and processes. The relevant law selected usually depends on a series of factors and is largely driven by the creditors involved.

State Law

Under State law, the person appointed to administer a person’s estate (usually referred to as an executor), can simply approach each creditor and deal with them directly with regards to part payment or to write off the debt.

Subsequently, State law is often relied upon when the bankrupt estate has minimal debt, or the circumstances are relatively simple.

In this instance, a trustee in bankruptcy does not need to be appointed.

Federal Law

Federal law applies in more complex matters or if values owing from the bankrupt estate are higher.

Most of the ‘big’ creditors such as banks or the Australian Taxation Office will usually opt for Federal law to apply as there is a more structured system and order of priority as to who gets repaid what.

In this instance, a trustee in bankruptcy must be appointed to administer the insolvent estate.

To administer an insolvent deceased estate under federal law, the deceased must fit within one of the following criteria:

  1. They were personally present or ordinarily a resident in Australia;
  2. They had a dwelling house or place of business in Australia;
  3. They were carrying on business in Australia, either personally or by means of an agent or manager; or
  4. They were a member of a firm or partnership carrying on business in Australia by means of a partner or partners, or of an agent or manager.

The debt must also be no less than $5,000.

If the above applies, the executor of the deceased estate or a creditor of the deceased estate may apply to the Federal Court to appoint a bankruptcy trustee. Once appointed, the bankrupt trustee must determine which of the testator’s assets are available to distribute to creditors.

What do I need to know?

Dealing with a bankrupt estate can be very complex. It is vital to understand how to administer an estate if there are not enough funds to cover all of the debts. Any beneficiaries of an estate or executors of an estate should seek specific legal advice about what is required, as should co-owners of property held by the deceased.

General Advice Disclaimer
Information provided on this website is general in nature and does not constitute financial or legal advice. Every effort has been made to ensure that the information provided is accurate, but information may become outdated as legislation and new government announcements are made. Individuals must not rely on this information to make a financial, investment or legal decision as it does not take into account their personal circumstance. Before making any decision, we recommend you consult a licensed adviser or legal practitioner to take into account your particular objectives, circumstances and individual needs.