Insolvent estates: what happens when debts are more than the estate is worth

Last updated 12 September 2026

Reviewed by the After Loss Guide editorial team · updated 12 September 2026

Researched from primary sources. See our editorial policy.

Most guides to probate assume there’s something left over once the debts are paid. But it isn’t unusual for an estate to owe more than it’s worth – a mortgage bigger than the house is worth after a market downturn, credit card debts run up in later life, or care home fees that outlasted the person’s savings. When that happens, the estate is described in law as insolvent, and a different set of rules takes over.

This guide explains what an insolvent estate is, the strict legal order in which debts must be paid, and how an executor or administrator protects themselves from personal liability if they get it wrong. It covers England and Wales.

What makes an estate “insolvent”

An estate is insolvent when its assets, once realised, aren’t enough to pay everything it owes. This is a factual question, not a formal declaration – there’s no separate “insolvency test” certificate to obtain. As the executor or administrator, you work it out by adding up everything the estate owns (savings, property, possessions, anything owed to the deceased) and comparing that to everything it owes (mortgages, loans, credit cards, unpaid bills, tax, funeral costs, and the costs of administering the estate itself).

It’s worth being precise about what “insolvent” does and doesn’t mean here. An estate where debts can be paid in full, but there’s nothing left for the people named in the will, is not insolvent – it’s simply an estate with no residue. Insolvency specifically means the debts themselves cannot all be paid in full.

Debts don’t disappear when someone dies. They become a liability of the estate, and the personal representative – the executor named in the will, or the administrator if there’s no will – is responsible for settling them from the estate’s assets, in the correct legal order, before anyone inherits anything. See our guide to do I need probate? if you’re not yet sure whether the estate needs a grant at all, and our guide to grant of probate vs letters of administration for which grant applies to your situation.

The law that governs insolvent estates

The rules for an insolvent estate aren’t found in ordinary probate law. Instead, the Administration of Insolvent Estates of Deceased Persons Order 1986 (SI 1986/1999) applies the same statutory framework used for personal bankruptcy to a deceased person’s insolvent estate, with some modifications (legislation.gov.uk – The Administration of Insolvent Estates of Deceased Persons Order 1986).

The key provision is Article 4 of that Order, which states that where an estate is insolvent and is being administered outside formal bankruptcy, “the same provisions as may be in force for the time being under the law of bankruptcy with respect to the assets of individuals adjudged bankrupt shall apply to the administration of the estate” – covering the rights of secured and unsecured creditors, which debts count, and the order debts and other payments are made in. Article 4(2) adds an important modification specific to deceased estates: “the reasonable funeral, testamentary and administration expenses have priority over the preferential debts” (legislation.gov.uk – Article 4).

In practice, this means the priority scheme built for personal bankruptcy under the Insolvency Act 1986 – sections 328 and 329, and Schedule 6 – governs how an insolvent estate’s assets are shared out, with funeral and administration costs given a specific boost ahead of most other claims.

Most estates never come close to this. It only applies once you’ve established that the debts genuinely exceed what the estate can pay.

The order of priority

Based directly on Article 4 of the 1986 Order and sections 328–329 of the Insolvency Act 1986, the payment order for an insolvent estate runs as follows:

Order Category What it covers
1 Secured creditors (against the specific asset securing them) A mortgage lender or a lender with a legal charge is paid from the sale of that specific property or asset, up to its value, before the general priority order applies to what's left
2 Reasonable funeral, testamentary and administration expenses The funeral bill, the cost of obtaining the grant, and the reasonable costs of administering the estate – these rank ahead of preferential debts under Article 4(2) of the 1986 Order
3 Preferential debts Set out in Schedule 6 of the Insolvency Act 1986. In practice this category is dominated by unpaid employee wages and holiday pay – relevant if the deceased employed staff (for example, a live-in carer or a small business), rarely relevant otherwise
4 Ordinary unsecured debts Credit cards, personal loans, overdrafts, unpaid utility bills, council tax arrears, and unpaid income tax – these all rank equally with each other, including debts owed to HMRC, under section 328(3) of the Insolvency Act 1986
5 Interest on debts Interest that has accrued on the above debts since the death, under section 328(4)
6 Debts owed to a spouse or civil partner Under section 329, any money the deceased owed to their own spouse or civil partner (for example, an informal loan) ranks last, after the interest above

Within each category, debts rank equally with each other. If there’s enough money to pay a category in full, it’s paid in full and the executor moves to the next category. If there isn’t enough to pay a whole category, the available money is shared out proportionally between the debts in that category – so if there’s only enough to pay 60% of the unsecured debts, every unsecured creditor gets 60% of what they’re owed, not paid in a particular order within that tier (Insolvency Act 1986, s.328).

Once a lower category runs out of money entirely, anyone in that category or below gets nothing. There is no discretion to pay a friend or a smaller, sympathetic creditor ahead of a bigger one in the same tier – the law requires equal, proportionate treatment within each level.

A common misconception: HMRC does not jump the queue

It’s a reasonable assumption that unpaid tax would have some kind of special priority, but for an ordinary personal estate it doesn’t. The categories in Schedule 6 that historically gave preferential status to some tax debts (sums due to the former Inland Revenue and Customs and Excise) were removed by the Enterprise Act 2002 and no longer apply (legislation.gov.uk – Insolvency Act 1986, Schedule 6). Unpaid income tax on an ordinary deceased individual’s estate is treated as an ordinary unsecured debt – it ranks in the same tier as credit cards and personal loans, not ahead of them.

Why the order matters so much for the executor personally

Getting this order wrong isn’t just a technical slip. If a personal representative pays a lower-priority debt while a higher-priority creditor is left unpaid, and the estate then runs out of money, the executor or administrator can be held personally liable for the shortfall to the creditor who should have been paid first.

This is one of the more serious risks of taking on the role of executor for an estate that might be insolvent. There’s no requirement that you knew the estate was insolvent when you paid – the personal liability can attach even to an honest mistake, if the wrong order was followed and a rightful creditor was shortchanged as a result. If you’re an executor and there’s any doubt about whether an estate can pay everything it owes, it’s worth pausing before paying anyone and taking advice, rather than settling debts as they arrive in the post.

Protecting yourself: the Trustee Act 1925 section 27 notice

Executors have one significant, well-established form of protection: placing a notice under section 27 of the Trustee Act 1925 in The Gazette (the official public record) and a local newspaper covering the area where any land in the estate is situated, inviting creditors to come forward within a set period – normally at least two months (legislation.gov.uk – Trustee Act 1925, section 27).

If you place this notice, wait out the period, and then distribute the estate according to what you knew about at the time, you’re protected from personal liability if an unknown creditor turns up later – they can still pursue the beneficiaries who received the estate’s assets, but not you personally. This protection exists precisely because tracking down every debt a person had can be genuinely difficult, and the law doesn’t expect an executor to have a perfect, complete picture with no formal way of testing it. For more on how this notice period fits into the wider probate timeline, see our guide to how long probate takes.

The section 27 notice protects you from unknown creditors. It doesn’t change the priority order for creditors you already know about – you still have to pay those in the correct sequence.

What to do if you think an estate might be insolvent

Don’t distribute anything, and don’t pay any debts, until you have a clear picture. The temptation when a bill arrives is to pay it to stop letters and calls – but paying the wrong creditor first, before you know the full extent of the estate’s debts, is exactly the situation that creates personal liability.

Step 1: Establish the full picture. Write to every organisation the deceased dealt with – banks, credit card providers, utility companies, HMRC, the local council, any lenders – and ask for a formal statement of what’s owed as at the date of death. Do the same for assets: get a realistic valuation of the property (see our guide to valuing a house for probate) and a final balance for every account.

Step 2: Place a Trustee Act notice. Placing a section 27 notice costs around £120 (verified against The Gazette’s wills and probate page) and starts the clock on the protection described above. For an estate that might be insolvent, this step is not optional in practice – it’s the main safeguard available to you.

Step 3: Get professional advice before paying anyone. An insolvent estate is one of the clearest cases where instructing a solicitor is worth the cost, even for someone who would otherwise be comfortable administering probate themselves. A solicitor experienced in insolvent estates can confirm the correct order, help negotiate with creditors, and in more complex cases can advise on whether a formal Insolvency Administration Order – which hands the administration to a licensed insolvency practitioner under the same 1986 Order – is the more appropriate route. See our guide to probate costs for what professional help typically costs.

Step 4: Keep detailed records. Note every creditor you’ve identified, every payment made, the date, and the reasoning. If your handling of the estate is ever questioned, a clear paper trail showing you followed the statutory order in good faith is your best protection.

Can you refuse to be executor of an insolvent estate?

Yes. If you’ve been named as executor in a will and haven’t yet started dealing with the estate – haven’t “intermeddled,” in the legal phrase – you can formally step aside using form PA15, a deed of renunciation (gov.uk – Give up probate executor rights (PA15)). Once you’ve taken any action to deal with the estate’s assets, this option closes off, so if you have concerns about an estate’s solvency, it’s worth raising them before you do anything on the estate’s behalf. See our guide to how to apply for probate for how renunciation fits into the wider application process, and letters of administration for what happens if every named executor steps back.

Being an executor is not compulsory, and knowingly taking on an estate you suspect is significantly insolvent, without a clear plan for managing that risk, is not something you have to do simply because you were named in the will.

Does an insolvent estate affect the beneficiaries personally?

No. Beneficiaries are not liable for the deceased’s debts. If the estate is insolvent, the practical effect is that beneficiaries receive less than the will promised them – potentially nothing at all – because the debts are paid first. Nobody inheriting under the will or under intestacy rules has to use their own money to make up a shortfall the estate can’t cover, unless they had personally guaranteed a debt (for example, as a joint account holder or loan guarantor) in their own right, which is a separate liability from anything to do with being a beneficiary.

Summary

  • An estate is insolvent when its debts, once totalled, exceed what its assets can realistically pay – this is a factual assessment, not a formal status you apply for
  • The Administration of Insolvent Estates of Deceased Persons Order 1986 applies bankruptcy-style priority rules to insolvent estates
  • The order is: secured creditors (against their specific security) → funeral and administration expenses → preferential debts (mainly employee wages, rarely relevant) → ordinary unsecured debts, including HMRC → interest → debts owed to a spouse or civil partner
  • Within each category, creditors are paid equally and proportionately if there isn’t enough to pay everyone in full
  • Executors who pay debts in the wrong order can be held personally liable for the shortfall to creditors who should have been paid first
  • A section 27 Trustee Act 1925 notice protects executors from liability to creditors they didn’t know about, but not from getting the known order wrong
  • Get professional advice before paying any debts if you think an estate might be insolvent – this is one of the clearest situations where a solicitor’s fee is money well spent

Sources