Insolvent Estates: The Do’s and Don’ts for Private Client Practitioners
Administering an estate is rarely straightforward. When debts outweigh assets, the position becomes significantly more complex and far more risky. Around 1 in 20 estates in England and Wales are insolvent, and that figure is likely to rise as higher levels of debt are carried into later life.
Yet they are still treated by many private client practitioners as a slightly awkward variation of routine administration. They are not.
Published: March 19th, 2026
4 min read
An insolvent estate is a fundamentally different exercise. The rules change, the risks increase, and the consequences of getting it wrong are often personal. This is where private client lawyers get caught out.
The uncomfortable truth: you are not really acting for the beneficiaries
Most estate administrations are run with the beneficiaries in mind. That instinct is hard to shake.
But in an insolvent estate, it is the wrong mindset. Once insolvency is in play, the personal representative’s duty shifts firmly towards creditors. That is not a subtle adjustment, it is a complete change in focus.
Fail to recognise that, and the rest of the mistakes tend to follow:
premature distributions
informal decision-making
“common sense” approaches to payments
All of which can lead to liability.
What is an Insolvent Estate?
An estate is insolvent where the total value of its assets is insufficient to meet all debts and liabilities in full.
In practice, that is not always obvious at the outset. Insolvency may only become apparent once:
assets are realised for less than expected
previously unknown liabilities come to light
claims are brought against the estate
Once insolvency is engaged, the entire approach to administration must change.
The Do’s
1. Do identify insolvency early - and keep it under review
This is the most important step, and one that is often underestimated.
At the outset, practitioners should ask:
What liabilities are known?
Are there contingent or disputed claims?
How reliable are the asset valuations?
Crucially, this is not a one-off exercise. Solvency must be kept under review throughout the administration. Estates move. Values change. Claims emerge. What looks comfortably solvent at the outset can drift quietly into insolvency. An estate that appears solvent can quickly tip into insolvency, particularly where:
litigation is ongoing or anticipated
property values fall short of expectations
significant care costs or tax liabilities arise
By the time that becomes obvious, it is often too late:
assets have been distributed
lower-ranking debts have been paid
the statutory order has been breached
At that point, the legal analysis becomes academic. The issue is who is going to make good the loss.
Once an estate is, or is likely to become, insolvent:
the PR’s focus must shift from beneficiaries to creditors
different rules apply
the risk of personal liability increases significantly
Early identification allows the PR to pause, take advice and consider whether a formal insolvency process is required. Late identification often means the damage has already been done.
2. Do follow the statutory order of priority - strictly and without exception
Not every insolvent estate requires a formal insolvency process.
In many cases, the estate can be administered by the personal representative under the statutory insolvency regime for deceased estates. In effect, the PR takes on a role similar to that of a trustee in bankruptcy, but without court appointment.
If there is one rule that cannot be relaxed, it is this. In an insolvent estate, debts must be paid in a strict statutory order. Broadly, this runs:
Secured creditors
Funeral and testamentary expenses
Preferential debts
Unsecured creditors
Interest and deferred debts
Creditors within the same category must be treated equally.
Two points must be clearly understood.
(a) No discretion
The flexibility usually associated with estate administration does not apply. The PR cannot:
prefer one creditor over another
prioritise debts based on perceived fairness
make distributions to beneficiaries while debts remain unpaid
The order is fixed by law.
If there is one rule that causes the most difficulty in practice, it is the statutory order of payment. Not because it is complicated, but because it runs directly against instinct. Private client lawyers are used to exercising discretion. Insolvent estates remove it.
There is:
no flexibility
no scope for “doing what feels fair”
no ability to prioritise smaller or more pressing debts
The order is fixed and yet in practice it is often breached in entirely predictable ways:
paying accessible or vocal creditors first
settling urgent liabilities out of sequence
making interim distributions “on account”
Each of those decisions can create personal liability.
Worse still, paying a lower-ranking creditor while a higher-ranking one remains unpaid may be treated as an admission that the estate is insolvent and used against the personal representative later.
(b) Personal liability for mistakes
If the order is not followed:
the PR may be required to make good the shortfall personally
they may face claims from creditors or beneficiaries
they risk allegations of devastavit (misadministration)
Practical point
Before making any payment:
confirm the category of debt
check whether higher-ranking debts exist
record the reasoning
If there is any doubt, do not proceed.
3. Do consider whether an Insolvency Administration Order is needed
Under the statutory insolvency regime, the PR must:
collect and realise all assets
identify and verify creditors
apply the statutory order of priority
distribute funds proportionately between creditors of equal rank
This regime is governed by the Administration of Insolvent Estates of Deceased Persons Order 1986, which adapts bankruptcy principles to estate administration.
In straightforward cases, for example:
a single significant liability, or
a limited and clearly identifiable creditor body
this approach is often appropriate and cost-effective.
Where does this become risky?
There is a persistent reluctance to move insolvent estates into a formal insolvency process. On one level, that is understandable. Administering the estate “in-house” is often quicker, cheaper and more familiar. But that can be a false economy.
In simple cases, it is entirely appropriate for a PR to administer an insolvent estate. However, it is not appropriate where complexity appears because the PR remains fully exposed:
they retain personal responsibility for the administration
they do not have the full range of insolvency powers
This becomes problematic where:
debts are disputed or uncertain
transactions prior to death require investigation
assets are burdensome or difficult to realise
litigation is ongoing or likely
In these cases, the PR is effectively operating without the tools usually available in formal insolvency.
An Insolvency Administration Order is often viewed as an escalation. In reality, it is frequently a risk management tool.
When should an Insolvency Administration Order be considered?
An Insolvency Administration Order (IAO) places the estate into a formal insolvency process under the control of a trustee.
This is often appropriate where:
the estate is complex or contested
recovery action may be required
creditor pressure is increasing
the PR wishes to reduce personal risk
The trustee assumes responsibility and has enhanced statutory powers, including the ability to recover assets and deal with onerous property.
Practical takeaway
Administering an insolvent estate personally is entirely acceptable, but only where the position is clear and straightforward.
Once complexity arises, the better question is not whether the PR can proceed, but whether they should.
4. Do advertise for creditors
Advertising for creditors (for example in the Gazette) is a simple but effective safeguard.
It:
helps identify unknown claims
provides protection against later claims
Given the limited cost, it is difficult to justify omitting this step.
5. Do check for bankrupt beneficiaries
If a beneficiary is bankrupt:
their entitlement passes to their trustee in bankruptcy
it must not be paid to them directly
This applies even if the beneficiary has been discharged.
A bankruptcy search prior to distribution is essential.
6. Do document decisions carefully
The hardest cases are not clearly insolvent estates. They are the uncertain ones.
The estate that might be solvent unless a claim succeeds or the estate that looks viable unless litigation costs escalate. This is the grey zone, and it is where many personal representatives come unstuck.
Because there is a natural tendency to:
assume the best outcome
proceed on the basis that claims will fail
continue administering as if the estate is solvent
That approach is risky. In the grey zone, the personal representative is not just administering the estate, they are managing competing risks. That requires:
a realistic assessment of claims (not optimism)
a clear understanding of potential financial exposure
a willingness to confront the cost of litigation
Why documentation matters
In the grey zone, outcomes are uncertain, but process is critical.
If challenged, the court will focus on:
whether risks were identified
whether relevant factors were considered
whether the decision was rational and informed
Accordingly, the PR should maintain:
attendance notes
written risk assessments
records of advice received
clear reasoning for key decisions
Without this, even a sensible decision may be difficult to defend.
Common Scenario’s
Estates that fall into the grey zone often arise where:
there is a significant disputed claim
liability depends on litigation
asset values are uncertain
In these circumstances, the PR is dealing with risk and probability, not certainty.
They cannot simply favour beneficiaries, nor assume creditors will prevail. Instead, they must adopt a balanced and reasoned approach.
What does this involve?
Assessing the strength of claims
The PR must form a view on:
the credibility of the claim
the supporting evidence
the likelihood of success
This may require specialist advice. Ignoring a claim is not an option.
Weighing potential liabilities
The PR must consider:
the potential value of the claim
whether it could render the estate insolvent
whether multiple liabilities could arise
Even a low-probability claim must be taken seriously if the financial consequences are significant.
Considering litigation risks and costs
The PR should evaluate:
likely legal costs
proportionality to the estate value
whether costs alone could lead to insolvency
A strong defence is not always a commercially sensible one.
Practical takeaway
In the grey zone, the PR is no longer simply administering an estate, they are managing competing risks and interests.
The safest approach is to:
engage with the uncertainty
analyse it properly
document the reasoning clearly
That is often the difference between a defensible decision and personal liability.
The Don’ts
1. Don’t distribute to beneficiaries too early
Distributing before all debts are settled is a common and serious error.
If the estate later proves insolvent:
funds may need to be recovered
or the PR may be personally liable
2. Don’t pay creditors in the wrong order
There is no flexibility in the statutory order.
Even well-intentioned decisions can give rise to liability.
3. Don’t assume administration is straightforward
Insolvent estates often involve:
disputed claims
contingent liabilities
asset recovery issues
Where complexity arises, reconsider the appropriate process.
4. Don’t ignore the grey zone
Uncertainty increases risk. Decisions must be reasoned, documented and defensible.
5. Don’t forget your duty to creditors
In an insolvent estate, creditors take priority.
Failing to recognise that shift is a common and costly mistake. Insolvent estates are not simply more difficult, they are more hazardous. The rules are strict, the margin for error is limited, and the consequences of getting it wrong are often personal. Handled properly, they are manageable. Handled carelessly, they are a liability waiting to crystallise.
Get the clarity you need. If you have concerns or are involved in a trust or estate dispute, do not delay in getting in touch. Our expert contentious probate team is here to guide you towards a resolution.
For more information or to arrange a consultation call 0800 689 3607 to speak with a member of our team.
For further information please contact John Lambe
