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Bankrupt Deceased Estates (NSW)

If a bankrupt person dies, all assets available from their estate are divided equally among their creditors. A bankrupt deceased estate in New South Wales can be administered either by the state Probate and Administration Act 1898 or the federal Bankruptcy Act 1966.

Bankruptcy Act

Under this Act, a creditor who is owed $5000 or more can apply to the court for an order for the administration of a bankrupt deceased estate. Such an order can be made only by the Federal Circuit Court of Federal Court. For an order to be made, the debtor must have satisfied one of the residency requirements under the Act. These are, that at the date of their death, the debtor:

  • was present or ordinarily resident in Australia;
  • had a home or business in Australia;
  • was carrying on a business in Australia, personally or via an agent;
  • was a member of a partnership carrying on a business in Australia as a partner or via an agent or manager.

An application should be verified by an affidavit, and must not be made unless the debt is a liquidated sum (a fixed figure) and is payable immediately or at a certain future time.

If there is a legal representative of the deceased person, that representative has 28 days from the date of the order to supply a statement of the deceased’s person’s affairs to the Official Receiver (a public official or body appointed to help administer the estate).

First expenses paid as a priority from the bankrupt deceased estate are the funeral, testamentary and administration expenses.  The rest of the debts are paid in accordance with the rules of priority set out in the Act. A creditor of a deceased estate should be aware of the priority of payment of debts owed by the estate.

Some assets may be immune from the bankrupt deceased estate and therefore able to be passed to a beneficiary. Generally the deceased’s superannuation and any life insurance policies will not form part of the estate and so cannot be used to pay the deceased’s debts.

If all debts have been paid in full, the order for administration of the estate is annulled and a certificate stating this is provided to the Official Receiver. If the value of the assets in the deceased estate is insufficient to pay off all debts, unpaid debts will die with the person. If a debt was a joint debt or was guaranteed by someone, the debt automatically passes to the surviving co-owner or guarantor.

Probate and Administration Act

Under this Act, upon the grant of probate or administration, all property belonging to the deceased person vests in the executor or administrator.

Unlike the federal legislation, this Act allows the court to make a special order, on application by the administrator or executor. The order can direct the:

  • time and mode of sale of any real estate;
  • letting and management of any real estate until sale;
  • sale of shares or income from shares be applied to the maintenance or advancement of infants;
  • the expedience and mode of dividing real estate if an application is made for this.

The court must generally administer real estate “for the greatest advantage of all persons interested”.

If a bankrupt person dies intestate (without a will), their bankrupt deceased estate vests in the NSW Trustee. The estate is then distributed in accordance with the Succession Act 2006. The court can grant administration to the deceased person’s spouse, one or more of the next of kin, or the spouse jointly with one or more of the next of kin. If this is not possible, any person the court thinks fit, whether a creditor or not of the deceased, can be granted administration by the court.

Bankruptcy after death

A person can be made bankrupt even after they die. For bankrupt deceased estates with few or no assets to distribute to creditors, the state Act may provide the best approach if this occurs. Creditors could be notified of the situation and requested to write off their debts. In more complex cases, the commonwealth Act may be a better option for reasons such as:

  • an independent trustee is appointed to administer the estate, relieving pressure on the executor;
  • creditors may prefer an independent trustee;
  • the Act has provisions that could enable recoveries from undervalues transactions, transfers to defeat creditors and preferential payments.

The process for a deceased person to become bankrupt is the same as for a living person: either voluntarily through the executor applying to the court, or by a creditor applying to the court to bankrupt the deceased person. The administration of the bankrupt estate is also similar to normal bankruptcy in that the trustee has the same obligations and powers. The challenge in bankrupt deceased estates is that the debtor is deceased, so cannot complete documentation, provide records or documents, or otherwise help the trustee perform their role.

For advice or representation in any legal matter, please contact Armstrong Legal.

Sally Crosswell

This article was written by Sally Crosswell

Sally Crosswell has a Bachelor of Laws (Hons), a Bachelor of Communication and a Master of International and Community Development. She also completed a Graduate Diploma of Legal Practice at the College of Law. A former journalist, Sally has a keen interest in human rights law.

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