Payment of Debts after Death

If you have ever been named as executor or administrator of the estate of a deceased person, you understand the many responsibilities this personal representative of the estate assumes. Administering an estate involves collection of assets, payment of debts and estate taxes, and distributions to the beneficiaries. This article focuses on the payment of debts.

When a petition to admit a will into probate is submitted, a concurrent notice to the deceased’s creditors must be published in the local newspapers. Even with no known creditors, the law requires publication of this notice. Creditors then have four months to present their claims. Any claims not presented within that time are forever barred from collection, unless the administrator knew, or should have known about, a creditor. Personal representatives try to use the notice rule to wipe out both large and small debts. Some even publish the notice in an obscure local paper, and then wait for the 4 months to pass. After that, the administrator can tell the creditors that it is too late, that they can’t be paid. To counter this tactic, many states have an additional rule. If the personal representative knew about the creditor, or with a little digging could have found out, the fact that the notice was published does not extinguish the debt. A known creditor has one year from the date of death to present a claim to the personal representative, unless the creditor has actual notice that the 4-month time period is ticking away. Actual notice means more than just a single entry in an obscure paper.

Once claims are presented, they must be paid. Usually, the deceased provides assets in the will to pay any debts. The personal representative should open an estate checking account specifically to pay any debts.

States differ in their approaches to handling a situation where the deceased did not set aside sufficient money to pay off the debts. Usually the gifts or family allowance to the surviving spouse and minor children as well as the costs of the funeral expenses and administration of the estate come first. Then, in some states, federal debts and taxes, medical expenses to limited amounts, debts and taxes payable to the state have priority over other claims. In other states, any real property in the estate is sold to pay off the creditors.

An estate attorney can answer specific questions about the priority of payment of claims to creditors of an estate in your state.

Case Studies: Payment of Debts after Death

Case Study 1: John’s Debt Settlement

John, as the personal representative of an estate, utilized the notice rule to eliminate both large and small debts. By publishing the notice in a local paper and waiting for the four-month period to expire, John successfully informed creditors that it was too late for them to receive payment. However, state-specific rules protect known creditors like Sarah or Mark, preventing the complete extinguishment of their debts.

Case Study 2: Insufficient Funds in Sarah’s Estate

Sarah’s estate did not allocate enough funds to cover her debts. The priority of payment varies by state. In some jurisdictions, the surviving spouse, minor children, funeral expenses, and estate administration costs take precedence. In other states, creditors such as Mark can claim proceeds from the sale of real estate in the estate to satisfy outstanding debts.

Case Study 3: Mark’s Unknown Creditors

Mark’s estate faces a unique situation where there are unknown creditors. Despite efforts to publish the notice to notify potential creditors, some individuals may be unaware of their claim rights. In such cases, state laws determine the timeframe within which unknown creditors can present their claims. Ensure all legitimate claims are addressed and resolved appropriately.