An estate is insolvent when its debts are greater than its assets. In England and Wales an executor must then pay those debts in a strict legal order set by the Administration of Insolvent Estates of Deceased Persons Order 1986, before any beneficiary receives anything. Paying in the wrong order can make the executor personally liable.
Most guides quote the order used for solvent estates. Once an estate is genuinely insolvent, a different statutory order applies, and getting it wrong is what exposes the person administering the estate to a claim against their own money. This guide sets out the correct order, where the funeral sits, and when to hand the estate to an insolvency practitioner. Rules and figures are current as at August 2026 and are subject to change.
What makes an estate insolvent?
An estate is insolvent when the total debts and liabilities of the person who died are greater than everything they owned. Mortgages, credit cards, personal loans, tax owed to HMRC and unpaid care fees all count as debts. The test is the value of the whole estate, so a house held in the deceased's sole name is an asset, but a mortgage secured on it is a debt against that asset.
You may only realise an estate is insolvent part-way through, once creditors respond to a notice or a large liability comes to light. If there is any doubt, treat the estate as potentially insolvent and pause distributions until the position is clear.
Do the family or beneficiaries inherit the debts?
No. Debts are paid from the estate's own assets, and they do not pass to relatives, next of kin or beneficiaries personally. If the estate cannot pay a debt in full, the unpaid balance is generally written off when the estate is exhausted, not chased from the family.
There are two common exceptions. A person who was a joint borrower, for example on a joint mortgage or joint loan, remains liable for that debt in their own right. So does anyone who gave a personal guarantee. Beneficiaries also lose the gifts left to them in the will, because there is nothing left to pay them once creditors are met, whatever the will says.
What order must an insolvent estate's debts be paid in?
Debts of an insolvent estate must be paid in the order set by the Administration of Insolvent Estates of Deceased Persons Order 1986, which applies the same priority as personal bankruptcy, with reasonable funeral and testamentary expenses moved to the top. Each class is paid in full before the next. Where a class cannot be paid in full, its members share what is left in proportion to what they are owed.
- Secured creditors. A lender with a charge, such as a mortgage, is paid from selling the asset it is secured on. Any shortfall drops down to become an ordinary unsecured debt.
- Reasonable funeral, testamentary and administration expenses. A reasonable funeral and the proper costs of administering the estate, including probate fees, rank ahead of everything below. "Reasonable" is judged against the deceased's circumstances, not the family's wishes.
- Preferential debts. A narrow category under Schedule 6 of the Insolvency Act 1986, mainly certain employee wages and holiday pay, plus HMRC "secondary preferential" taxes collected on its behalf, such as PAYE, employee National Insurance and VAT (since 1 December 2020, gov.uk, subject to change).
- Ordinary unsecured debts. Most debts sit here: credit cards, personal loans, utility arrears, and most tax HMRC is owed directly. If funds run short, these creditors are paid pro rata.
- Interest on preferential and ordinary debts, for the period after death.
- Deferred debts. Paid last, for example a loan from the deceased's spouse or civil partner.
Source: Administration of Insolvent Estates of Deceased Persons Order 1986 and the Official Receiver technical guidance, gov.uk, as at August 2026, subject to change.
How does this differ from a normal, solvent estate?
The order above is not the one most executors have seen. A solvent estate follows the Administration of Estates Act 1925, where every creditor is paid in full and the order only decides which gifts fund which debts. An insolvent estate switches to insolvency rules, where lower-ranking creditors may receive part of what they are owed, or nothing. Reading the wrong order is a frequent and costly mistake.
| Point | Solvent estate | Insolvent estate |
|---|---|---|
| Governing rules | Administration of Estates Act 1925 | Insolvent Estates Order 1986 (bankruptcy priority) |
| Creditors | All paid in full | Lower ranks paid pro rata, or not at all |
| Executor's main duty | To the beneficiaries | To the creditors |
| Beneficiaries | Receive the residue | Receive nothing |
Illustration based on gov.uk guidance, as at August 2026. Every estate is different and this is general information, not advice.
Who pays for the funeral if the estate is insolvent?
A reasonable funeral is paid from the estate ahead of almost every other debt, so the cost does not fall on the family personally in most cases. It ranks above preferential and ordinary creditors under the 1986 Order. Only the amount that is reasonable for the deceased's circumstances has that priority.
If a relative pays the funeral director directly, they can usually reclaim a reasonable cost from the estate before other creditors are paid. Keep the invoice. Where money is tight, a simple funeral protects more of that claim, and help may be available through a Funeral Expenses Payment (gov.uk, subject to change) for those on qualifying benefits.
How can an executor be personally liable, and how do you avoid it?
An executor becomes personally liable by paying the wrong people. If you pay a lower-ranking creditor, reimburse yourself, or release a gift to a beneficiary while a higher-ranking creditor goes unpaid, you can be made to replace that money from your own pocket. The duty in an insolvent estate is owed to creditors first.
In practice, the mistakes we see are paying the first creditor who writes in, settling a debt out of sympathy, or distributing a legacy before all liabilities are known. Follow a defensive sequence instead:
- Stop distributions. Pay no beneficiary and no ordinary creditor until you have a full picture of assets and debts.
- List everything. Value the assets and gather every liability, including tax owed to HMRC and any care fees.
- Advertise for creditors. Place a notice under section 27 of the Trustee Act 1925 in The Gazette and a local paper, giving creditors at least two months to come forward. This protects you against claims from creditors you did not know about.
- Pay strictly in order. Work down the statutory order, paying each class in full before the next and sharing pro rata where funds run short.
- Take advice early if the estate is clearly insolvent or the debts are contested.
What is an Insolvency Administration Order, and when should you use one?
An Insolvency Administration Order (IAO) hands administration of an insolvent estate to a qualified insolvency practitioner or the Official Receiver, who then distributes it much like a bankruptcy. It stays legal action against the estate and shields the personal representative from personal claims, which is its main attraction where creditors are aggressive or the estate is complex.
You do not always need one. Weigh it up like this:
- Consider applying for an IAO when debts are large or disputed, creditors are threatening action, there are business assets, or you want the protection of a court-supervised process.
- You may be able to administer it yourself when the estate is small, the debts are clear and uncontested, and you can follow the statutory order with advice where needed.
An IAO can be applied for by the personal representative or by a creditor, and the administration is treated as running from the date of death. Because there are costs and duties either way, many executors take advice before deciding, and some choose to speak to us about the options before committing to a route.
Should you still apply for probate?
You may not need a grant of probate purely to deal with debts, but you often still need one to gather and sell assets such as a house. Applying does not make you personally responsible for the debts, provided you then administer the estate in the correct order. If the estate is plainly insolvent, take advice on whether an IAO is a better route than a standard grant. Our guide to what probate is and when it is needed explains the basics.
Frequently asked questions
What is an insolvent estate?
An insolvent estate is one where the debts of the person who died are greater than the value of everything they owned. The executor must pay creditors in a strict legal order, and beneficiaries receive nothing because there is not enough to pay the debts in full.
Do I have to pay a deceased relative's debts myself?
No, not from your own money, unless you were a joint borrower or gave a personal guarantee. Debts are paid from the estate's assets, and any shortfall is generally written off. You can become personally liable only if, as executor, you pay creditors or beneficiaries in the wrong order.
What order are debts paid in an insolvent estate?
Under the Administration of Insolvent Estates of Deceased Persons Order 1986: secured creditors first, then reasonable funeral and administration expenses, then preferential debts, then ordinary unsecured debts, then interest, then deferred debts. Each class is paid in full before the next, and members of a class share pro rata if funds run short.
Who pays for the funeral if there is no money?
A reasonable funeral is paid from the estate ahead of most other debts, so it usually does not fall on the family. If a relative pays the funeral director, they can normally reclaim a reasonable cost from the estate. A Funeral Expenses Payment from gov.uk may help those on qualifying benefits.
Can an executor be held personally liable?
Yes, if you pay a lower-ranking creditor or a beneficiary while a higher-ranking creditor is unpaid, you can be required to replace that money yourself. Advertising for creditors under section 27 of the Trustee Act 1925 and paying strictly in the statutory order are the main protections.
What is an Insolvency Administration Order?
It is a court order handing an insolvent estate to an insolvency practitioner or the Official Receiver, who administers it like a bankruptcy. It stays legal action and protects the personal representative from personal claims. It can be sought by the executor or by a creditor.