Few creditors write off debts because the person who owed them has died. Anyone from credit card companies to the government will get in line to receive the funds due to them through the probate process of a will. Procedures for doing this vary somewhat from state to state, but there are certain general rules to keep in mind.
Priority of Claims
Most states list creditors against an estate in order of importance. A creditor at the bottom of the list is paid after everyone else has been paid, assuming there is enough money in the estate left at that point. In general, the costs of probating the decedent’s will are paid first. These include court fees and any professional fees that might be necessary, such as to attorneys or accountants. Funeral expenses are paid next. Taxes are usually third in line, followed by secured loans and finally, unsecured loans.
A portion of the deceased’s estate is usually exempt from claims by creditors. In most states, the surviving spouse and minor children receive a living allowance off the top of the estate for anywhere from a year to 18 months, depending on the state. Immediate family is also usually allowed up to approximately $20,000 in personal property left by the deceased. If these provisions exhaust the estate’s funds and assets, claims by creditors cannot be satisfied.
Various taxes are due during the probate period of a will. If the assets of an estate earn any income, then the estate must pay an income tax return. Some states levy inheritance taxes and the IRS will claim a death tax as well on estates valued at over $3.5 million. The deceased’s final income tax return for the year he died must also be filed and any taxes paid.
Secured loans are those giving the lender some collateral to reclaim if the loan is not repaid. Mortgages and auto loans fall into this category. An executor must generally give these creditors notice by registered or certified mail that the estate is in probate. The creditor then has the option of accelerating the debt and calling the full amount due, or continuing the loan with the estate or the beneficiary taking over the payments. In cases of mortgages, the estate might not have enough liquid funds to pay the loan if it is called due and the property might have to be sold.
Unsecured loans are with creditors such as credit card companies. Generally, the executor of an estate does not have to give these creditors personal notice, although most states require a notice published in a newspaper. Unsecured creditors then have a period of time, usually three to four months, to submit a claim to the estate for the money owed.
When an unsecured creditor makes a claim against the estate for payment, most states allow the executor or any other interested party to dispute it. The executor sends notice to the creditor, rejecting the claim, and they have the right to file a lawsuit with the probate court to have a judge decide the matter.