When the estate has more debts than it's worth

First, confirm it really is insolvent

List everything the person owned at the date of death, then everything they owed. Some things are not in the estate at all and must be left out of the calculation: a jointly owned home held as joint tenants, life insurance written in trust, and most death-in-service benefits pass directly to someone else and are out of reach of creditors.

Debts that die with the person: nothing, as a rule. Debts are not written off on death, they're paid from the estate. But nobody else becomes liable for them unless they were a joint borrower or a guarantor. Children do not inherit a parent's debts.

Stop paying anyone until you know the order

The moment you suspect insolvency, stop distributing and stop settling bills as they arrive. The order of payment for an insolvent estate is set by the Administration of Insolvent Estates of Deceased Persons Order 1986, and it is not the order creditors chase you in.

Broadly, the order is: secured creditors out of their security; then reasonable funeral, testamentary and administration expenses; then preferential debts (mainly certain employee claims); then ordinary unsecured debts such as credit cards, loans, utilities and overpaid benefits; then interest; then anything deferred.

If you pay a credit card in full and there turns out to be no money left for a higher-ranking creditor, you can be ordered to make that up personally.

Protect yourself with a statutory notice

Place a deceased estates notice in The Gazette and in a newspaper circulating where the deceased lived, under section 27 of the Trustee Act 1925. It gives creditors at least two months to come forward.

If you distribute after that period has expired and after making proper searches, you are protected from personal liability to creditors who turn up late. They can still pursue beneficiaries, but not you. The notice costs around £70 to £100 in The Gazette and it is the single cheapest piece of protection an executor can buy.

Funerals are treated differently

Reasonable funeral expenses rank ahead of ordinary debts, so a modest funeral can properly be paid from the estate even when the estate is insolvent. 'Reasonable' means proportionate to the estate, not to what the family would have liked.

If the estate genuinely cannot pay, look at the DWP Funeral Expenses Payment, or, where nobody can pay at all, the local council or hospital has a duty to arrange a public health funeral. Whoever signs the funeral director's contract is personally liable for that bill, so do not sign before you know what the estate holds.

When to hand it over

Consider getting a solicitor or an insolvency practitioner involved if:

• The shortfall is large or the creditors include HMRC
• There are business debts, or the person was a sole trader or partner
• Anyone has already been paid out and would need to hand money back
• Creditors are threatening you personally
• You're being asked to renounce or would rather not act at all, which you can do if you have not started administering the estate