How a Creditor Can Disrupt Probate

November 20, 2023
Debtor refuses to accept call from creditor on smartphone.

A person’s will typically designates a personal representative, or executor. As part of their duties, the personal representative must issue a public record of the date when the will’s creator died. Often, they may do this by posting 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 determine whether the decedent owes any creditors. Generally, they must then notify the creditors within four months after the probate court issues letters of administration, or 30 days after learning about the creditor.

The personal representative should notify creditors within the timeframe outlined by the state. Otherwise, the probate court may rule the creditor can enter a late claim. This situation may apply to spouses who are creditors and can claim a breach of fiduciary duty against the deceased.

Communicating with Creditors

An Estoppel and fraud defense can protect a creditor if a personal representative goes back on their word or makes untrue assertions about 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. The court can stop the personal representative from arguing against the creditor claim. In addition, the court can extend a one-year statute of limitations to resolve the debt.

By law, after administration expenses of the estate and state and federal tax payments for the decedent, certain debts must receive payment 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 is separate. In most cases, any property of a surviving spouse that is separate will remain safe from creditors.

Rejected Creditor Claims

A personal representative of a decedent’s estate may reject a creditor’s claim. However, the creditor may then seek the help of a creditor rights law firm to litigate their claim. They can litigate within 90 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. The creditor will have more latitude to pursue the debt collection.

Creditor Claims Outside of Probate

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.

Negotiating Debt

Note that 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.

It may be better to contact a probate attorney or estate planning attorney for advice. Fraud does occur, and sometimes companies don’t 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 to 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, consult with an experienced probate lawyer. They can help you observe all deadlines, meet probate code legal requirements, and negotiate with creditors to reduce debt. In addition, they can assist you with wills, trusts, powers of attorney, and more.