The Bankruptcy Act 1966 (Cth) applies in all states of Australia. Under this Act, all assets available to the trustee in bankruptcy are divided equitably amongst the bankrupt’s creditors. Bankrupt deceased estates in New South Wales can be administered in bankruptcy. This includes estates for persons who are insolvent at the date of death and those deceased estates that become insolvent because of debts incurred by the legal personal representative of the deceased estate. If a person dies after the bankruptcy process has started, proceedings will continue as if they were still living.
In the alternative, bankrupt deceased estates in New South Wales can be administered under the Probate and Administration Act 1898. This provides a system for the ordered and rateable distribution of payments to creditors.
If the value of the estate is insufficient to pay off all of the debts, any unpaid debts will die with the individual. There is an exception to this rule where the debt was held jointly with someone (such as a mortgage on a property) or was guaranteed by someone else. In those cases, the debts automatically pass to the surviving co-owner or guarantor.
If an insolvent debtor dies leaving insufficient assets to pay their debts, any creditor or creditors who are owed $5,000 or more, or the person who is administering the estate of a deceased person, may seek an order for the administration of the estate in bankruptcy. The estate is made bankrupt in the same way as a living debtor is made bankrupt and the requirements are similar to those that apply in relation to creditors’ petitions against debtors that are alive. A major difference is that there is no need for an act of bankruptcy by either the deceased debtor or the legal personal representative of the deceased debtor.
An application may be made to the Federal Court for an order by presenting a petition to the court to apply for an order of administration. If the application is granted, the trustee is required to distribute the deceased person’s assets so as to pay part, or all, of the debt in accordance with the Act. When an estate is administered by a trustee in bankruptcy, the executor or administrator does not play any part in the administration of the estate.
An advantage of administering the estate under the Bankruptcy Act is that the value of the Estate may be increased. This is because it would be able to include property that was sold for less than market value and/or due to preferential payments before the start of the administration.
The executor can administer the estate by following the provisions of the Probate and Administration Act, even if the estate is bankrupt. The creditors will have to wait until the assets of the estate are available to the executor or the administrator (after the grant of probate or letters of administration) before they receive payment of the outstanding debts.
When an estate is bankrupt the funeral, testamentary and administrative expenses are the first priority for payment. The person who requests the funeral is responsible for paying the account but they are entitled to be reimbursed from the estate. Thereafter, secured creditors have rights guaranteed at law to them over goods or land belonging to the debtor and are paid before any unsecured creditors receive payment.
A bank that holds a mortgage over a property would be an example of this. The bank will be paid out under the mortgage before an unsecured creditor. If any of the deceased person’s assets have a mortgage or charge over them and they are given specifically by the will to a named beneficiary, those assets go to the named beneficiary subject to that charge or mortgage. The beneficiary who receives the asset is responsible for paying out the charge or mortgage.
After all the assets have been realised, any debts that are left unpaid will die with the person unless they are held jointly with another person or persons or were guaranteed by someone else. In those cases, the debts will automatically pass to the surviving co-owner/s or the guarantor.
Upon a person’s death, some assets are preserved from being used for the payment of any outstanding debts. The proceeds of superannuation funds and life insurance policies may not be available to pay debts, except for funeral or testamentary expenses, unless the will or a contract specifically says otherwise. The proceeds of these may be distributed by the executor in accordance with the will or the intestacy rules (Life Insurance Act 1995). Some Superannuation schemes under government funds are protected by legislation and the protection cannot be revoked by a will.