Creditors and Probate - What You Need to Know About Outstanding Debt
By Don Drake, Connelly Law Offices, Ltd.
Dealing with the aftermath of a person's passing can be overwhelming, especially when it comes to managing their debts. RJ Connelly III, a professional fiduciary and certified elder law attorney, states that the responsibility of paying off the deceased's debts falls on their estate.
"A will can provide guidance by appointing a personal representative or executor to handle this process," Attorney Connelly stated. "In most cases, the executor is required to make a public record of the testator's date of death, which is typically done by publishing a notice in a local newspaper. This serves as a notice to creditors who may have outstanding debts owed by the deceased, allowing them to make claims against the estate's assets."
Notifying Creditors
The extent of the creditor notification depends on the state's laws and the type of debt. Generally, the executor must notify ascertainable creditors within a specified number of months after the probate court issues letters of administration or within thirty days of learning about the creditor. If the executor fails to notify the creditors within the state's allotted time, the probate court can allow the creditor to enter a late claim.
It is possible for a creditor to be a spouse who can claim a breach of fiduciary duty against the deceased in certain cases. In such situations, an estoppel may be invoked. Estoppel is a legal principle that prohibits an individual from arguing or asserting a right that contradicts what they previously said or agreed to by law. This means that if a personal representative goes back on their word or makes a seemingly untrue assertion for debt payment, the creditor can use an estoppel and fraud defense to protect themselves.
Attorney Connelly explained how personal representatives may resort to unethical practices to deceive creditors into thinking that an outstanding debt will be paid in full by the estate without the need for filing a claim. "This tactic is used to delay and allow creditor deadlines for probate court to expire," he stated. "In such situations, the court's integrity is compromised, and creditors are left with no choice but to bear the loss. Such actions not only violate legal and ethical codes but also reflect poorly on the personal representative's ability to act in the best interest of the estate."
By law, certain debts must receive payment via the estate as soon as funds are available. "These include funeral expenses, medical costs associated with the last illness from which the decedent died, family allowances that provide for financially dependent members to cover expenses during the estate administration, and valid wage claims against the decedent by employees or contractors," Attorney Connelly said.
More on Creditors
If there are insufficient funds to repay the debt, a surviving spouse may be liable for the debt unless they can prove that the debt is separate. However, any property of a surviving spouse that is separate will remain safe from creditors. A creditor with a rejected claim by the executor of a decedent's estate may seek the help of a creditor rights law firm to litigate their claim within ninety days of the rejection of the claim. If there is enough evidence to support and validate a creditor's claim, a court will enter judgment for the estate to pay the claim to the creditor, giving the creditor more latitude to pursue debt collection.
"When the decedent's property does not pass through probate, a creditor's claim is not subject to such stringent timelines," stated Attorney Connelly. "Theoretically, a creditor can track down the property and sue its new owner to satisfy the debt a year or two later. Property distribution without probate has no legal requirement to notify creditors in writing. It is possible for a creditor to not know of the death for years or the property location. If the debt is not large, it may not be worth a creditor's time to track down the new owners for collection."
Not all debts are equal and valid. A personal representative can negotiate with creditors to lower the debt amount to preserve the maximum amount for beneficiaries and heirs. Fraud does occur, and sometimes, companies do not keep accurate records. Any settlement offer must be in writing to protect the estate, and all payment data must be kept in a record. In the case of an insolvent estate, the court requires all creditors filing valid claims to receive payment under a pro-rata division of estate assets.
If you are a personal representative of an estate with significant debt, hiring an experienced probate attorney will be of great benefit. An experienced and knowledgeable probate attorney will help you observe all deadlines, meet probate code legal requirements, and negotiate with creditors to reduce debt.
The information provided in this blog is for general informational purposes only and should not be taken as legal, financial, or medical advice. The content, materials, and information presented in this blog may not be the most up-to-date information available regarding legal, financial, or medical matters. The purpose of this blog is to provide readers with an overview of the subject matter and a starting point for research. It is recommended that readers seek professional advice from an attorney, professional fiduciary advisor, or medical provider for specific legal, financial, or medical questions. Additionally, this blog may contain links to third-party websites that are included for the convenience of the reader or user. Please note that Connelly Law Offices, Ltd. does not necessarily recommend or endorse the contents of such third-party sites, and readers should exercise their own judgment when accessing these sites.