Just be honest. Don't try and hide stuff, or sugar-coat things: tell people how it is, why it is, and even if it's horrible initially I believe they'll thank you for it in the long run.

Do it as soon as you can. If you know now, tell them now. Every day you don't tell them is a day they're potentially missing out on another job.

For yourself, try and keep some perspective. Things happen. Life moves on. People recover.

Source: I had to tell 22 people that the company we were running had just gone in to administration and today was the last day. We only found out ourselves the day before when our "accountant" (grrr... anger still remains towards that one) revealed herself to be less than competent. It was horrible, but me and my colleagues just sat them down and laid it out straight and said we'd do whatever we could to help, and that was that.