Updated 22 October 2026
Administration of Estates - Potential Problem #34: Estate with Significant Debts
Managing an estate with significant debts can be daunting. Executors may discover mortgages, credit cards, business guarantees or tax liabilities that the family knew little about. Beneficiaries may expect an inheritance while creditors are asking for payment.
In NSW, the starting point is to establish what the estate owns and owes. Having a will does not cancel debts, and valuable property does not necessarily mean there is money available to distribute. Careful investigation, correct payment priorities and clear communication can help prevent avoidable losses.
1. Work out whether the estate is actually insolvent
An estate with substantial debts is not necessarily insolvent. It may own enough assets to meet its liabilities but have insufficient cash until an asset is sold or money owed to the deceased is recovered. That is different from an estate whose available assets cannot cover its debts in full.
Prepare a realistic balance sheet using current debt figures and supportable asset values. Allow for liabilities that have not yet been finalised and the expenses of administration. A property’s advertised value is not the same as the amount available after its mortgage and sale expenses.
AFSA’s guidance on deceased estates explains the legal pathways for insolvent estates. Obtain advice before making payments if the estate’s financial position is uncertain.
2. Secure the assets and collect the records
The NSW Government’s executor guide provides a useful starting point. Locate the will, protect property and arrange access to the records needed for administration. Check insurance, secure valuables and keep an inventory. Do not let relatives remove assets simply because they expect to inherit them.
Gather bank statements, mortgage documents, loan agreements, tax records and details of guarantees. Record money owed to the deceased as well as debts owed by them. Investigate whether those receivables are recoverable; an unpaid invoice or disputed family loan may not produce its face value.
Keep estate funds separate from your own money and maintain a clear record of every receipt and payment.
3. Check who owns the assets and owes the debts
Not every asset associated with the deceased belongs to their estate. Jointly owned property and superannuation death benefits require separate examination. Likewise, a company’s debts do not automatically become the debts of a deceased shareholder or director, although a personal guarantee may change the position.
Cancer Council NSW’s guidance on debts after death explains that family members do not ordinarily become personally liable merely because they are beneficiaries. A surviving joint borrower or guarantor may have their own obligations, and a creditor’s security over property may remain enforceable.
An executor is not automatically liable for the estate’s shortfall. However, improper administration, including an unjustified distribution, can expose the executor personally.
4. Verify creditor claims before deciding who gets paid
Request written evidence of each claim, including the agreement, balance, interest calculation and any security. Check that it is a debt of the deceased and whether there are grounds to dispute it. Record disputed and contingent claims rather than quietly leaving them out of the estate’s calculations.
If insolvency is possible, do not pay whichever creditor calls most often or reimburse a family member simply because their request feels urgent. Identify secured claims, the applicable statutory priorities and the position of ordinary unsecured creditors. A tax bill should not automatically be treated as having priority over every other unsecured debt.
Administration under NSW law and under the Bankruptcy Act involves rules about which claims rank ahead of others and how available funds are shared. Get advice about necessary preservation expenses and proposed payments before committing the estate. Creditors may receive only part of what they are owed.
5. Choose the appropriate administration process
An insolvent deceased estate is not automatically placed into bankruptcy administration. AFSA explains that NSW administration under section 46C of the Probate and Administration Act is an alternative to administration under Part XI of the Bankruptcy Act. The appropriate route depends on the circumstances.
Part XI administration can involve a bankruptcy trustee and powers to recover certain preferential payments or transfers for less than market value. These issues need assessment before an executor tries to settle everything informally.
For context, AFSA recorded 24 insolvent deceased estates during 2024–25. That national personal-insolvency figure does not count every indebted estate or every insolvent estate administered under state succession law.
6. Consider asset sales without assuming every dispute needs court
A heavily indebted estate does not automatically require a court order to sell every asset. The executor’s authority, the will, ownership arrangements, security interests and any applicable insolvency process all matter. A court application may be needed where authority is unclear or a dispute requires resolution.
Obtain suitable valuations and consider how a sale would affect the estate overall. A family member’s wish to keep a property may be explored through a properly documented purchase or other lawful arrangement, but sentimental attachment cannot override creditor rights. Avoid transferring assets below value or promising beneficiaries a property before the liabilities are understood.
Explain the difference between the estate’s gross value and what might remain after liabilities. Regular written updates can help families understand why an expected inheritance has reduced or why distribution must wait. Keep decisions and supporting records available for the estate accounts.
Legal Aid NSW’s distribution guidance explains the executor’s responsibilities, including addressing tax obligations. Work with the accountant to identify outstanding returns and liabilities arising during administration. Do not assume the deceased’s last personal tax return completes every tax obligation.
An optional Notice of Intended Distribution may provide protection against unknown claims if statutory conditions are met. It does not cancel known debts or create a surplus where none exists.
8. A real NSW case about control of estate funds
In Application by Alan Maxwell Frost (2014), a deceased estate had entered administration under Part XI of the Bankruptcy Act after a substantial judgment exceeded its available funds. A bankruptcy trustee controlled the estate’s assets.
The executors later sought judicial advice from the NSW Supreme Court concerning a proposed High Court appeal and potential reimbursement of their costs. The Court refused the application. The underlying proceedings included allegations against the executors personally, and access to estate funds was subject to directions in the bankruptcy proceedings.
This decision did not establish that the executors had wasted estate assets, and it did not order a new liquidation. Its practical lesson is that executors should check their authority before committing to litigation or assuming the estate will reimburse their expenses.
9. Plan ahead and understand the scope of legal fees
Before death, keeping debt records current and reviewing the will after refinancing or business changes can make administration easier. A will cannot make an insolvent estate solvent, but it can give clearer instructions and reduce uncertainty.
A straightforward single will starts from $440 including GST. We confirm your fee in writing before we start.
This is a will-drafting fee, not a fee for administering an insolvent estate. Complex debt advice, estate administration and litigation require separate assessment and pricing. Ask what is included, what may attract additional charges and which external expenses are payable.
Contact CM Lawyers for advice on estate administration, creditor claims and executor responsibilities. Bring the will, available financial records and any creditor correspondence so the estate’s position can be assessed promptly.
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