Creditors and Probate
Many people know probate as the legal process wherein the property of a deceased person is passed on to new owners. But probate serves other important functions as well, such as ensuring that the deceased person’s debts are paid in a timely manner.
If someone who owes you money for goods or services dies before paying off the debt, you may be able to receive payment from the deceased person’s estate. To do so, you will have to file a claim in probate court.
In probate terminology, you are considered a creditor and your deceased debtor is called the decedent. In most cases, you will be contacted by a personal representative, who is in charge of closing the decedent’s estate on his or her behalf. It is the personal representative’s duty to publish notices about the decedent’s death and to diligently seek out creditors to inform them that probate is underway.
How to File a Creditor’s Claim
Creditors have a limited amount of time to submit formal claims after receiving notice of their debtor’s death, typically between three and six months. Legislation in the state where probate takes place will set the deadline. Once the deadline has passed, claims can no longer be filed, so missing the deadline means you won’t receive payment.
If some of the decedent’s property is transferred outside of probate, however, claims aren’t cut off as quickly. In theory, you could track down non-probated property from your debtor’s estate and sue the new owner to receive payment a year or two later.
Creditor’s claims must be submitted to the personal representative, who may require proof that the transaction took place. It is always advisable to provide copies of receipts, invoices, written agreements or other relevant documents to support your claim.
Once you file the claim, the personal representative will review it. He or she will approve or reject the claim, submit it to the court and then provide you with a copy. In the event that the personal representative neither approves nor reject your claim, you should assume that it was rejected. But within a certain time frame set by state law, you may still be able obtain compensation by filing a lawsuit outside of probate court.
When you receive payment for your claim, the personal representative will likely ask you to sign a receipt to prove that all outstanding debts are paid.
What if the Estate is Insolvent?
An estate is considered insolvent when it has more debts than assets. This means there are not enough funds to pay off all of the decedent’s creditors. Cases like this are similar to bankruptcy, in that the probate judge may require the personal representative to use estate assets to pay a portion of the debts. In some cases, the personal representative will need to sell property to cover the costs.
When claims are filed against an insolvent estate, creditors are divided into classes and paid according an order of priority. The order is set by state law. If the estate’s assets are drained before all valid claims are paid, the unpaid creditors do not receive compensation.
Certain debts and administrative fees take priority over others in probate. In Florida, for example, attorney’s fees and the personal representative’s administration expenses must be paid before all other debts.
Typically, the estate’s assets are distributed in the following order:
Administration expenses and other probate costs
Reasonable funeral expenses
Debts and taxes with preference under federal law
Expenses of the decedent’s final illness
Debts and taxes with preference under state law
All other claims
Starting at the top of the list, the creditors in each of these categories are paid before those in the categories that fall below. When the estate’s funds are depleted and all claims in a category cannot be paid, the remaining funds are pro-rated among that category’s creditors. Creditors in lower-priority categories won’t be paid.
The Importance of Knowing State Probate Laws
If a public notice or personal representative informs you that one of your debtors has passed away, you should familiarize yourself with the probate laws of the state in which probate will occur before filing a claim. Because procedures, deadlines and the order of payment for creditors can vary from state to state, it is always worthwhile to do some preliminary research.
To find out more about the laws that will affect your claim, you should consult with a qualified probate attorney in the state where proceedings will occur. If you want to look into the legislation yourself, visit the Probate Laws page and select a state in the State-Specific Probate Laws chart.