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Probate Disruption by Creditors
A testamentary’s personal representative (executor) is responsible for posting a public record of the decedent’s death in a local newspaper. In part, this information serves as notice to creditors if the decedent has an outstanding debt with them. The personal representative must also make a reasonable effort to notify ascertainable creditors.
Generally, this creditor notification is four months after probate court issues letters of administration or thirty days after learning about the creditor. If the personal representative does not notify creditors within the state’s allotted time, the probate court may rule the creditor may enter a late claim. This situation may apply to spouses that are creditors and who can claim breach of fiduciary duty against the deceased.
An Estoppel and fraud defense can protect a creditor if a personal representative goes back on their word or makes a seemingly untrue assertion for debt payment. Some personal representatives may lead a creditor to believe the estate will pay an outstanding debt in full without the creditor filing a claim, thus permitting time to pass and creditor deadlines for probate court lapse. The court can estop the personal representative from arguing the claim by the creditor is time-barred though there is usually a one-year statute of limitations for this action.
By law, after administration expenses of the estate and state and federal tax payment for the decedent, certain debts must receive payment via the estate as soon as funds are available. These debts include:
- Funeral expenses
- Medical costs in association with the last illness from which the decedent died
- Family allowances that provide for financially dependent members to cover expenses during the estate administration
- Valid wage claims against the decedent by employees or contractors
Decedent debt liability does not affect a personal representative unless a creditor can prove estate mismanagement by the administrator. In general, a surviving spouse in a community property state equally owes acquired debt. If there are insufficient funds to repay the debt, a spouse can be liable unless they can prove the debt to be separate. In most cases, any property of a surviving spouse that is separate will remain safe from creditors.
A creditor with a rejected claim by the personal representative 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 claim, a court will enter judgment for the estate to pay the claim to the creditor. At this time, the creditor now has more latitude to pursue the debt collection.
A creditor’s claim is not subject to such stringent timelines when the decedent’s property does not pass through probate. 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 kept in record. In the case of an insolvent estate, the court requires all creditors filing valid claims receive payment under a pro-rata division of estate assets.
Creditors have the right to pursue valid debts against an estate. If you are a personal representative of an estate with significant debt, hiring an experienced probate lawyer will be of great benefit. Your probate attorney will help you observe all deadlines, meet probate code legal requirements, and negotiate with creditors to reduce debt. If you’d like to discuss your particular situation, please contact our Sherwood or Searcy office at 501-834-2070 to discuss how we can help you or your loved one.