Paying creditors is an important part of the probate process of a will. Probate law in most states imposes limits on what creditors can and cannot do to collect on debts owed to them by the person who died. Next of kin are rarely held responsible.
Payment Through Probate
When a will is in probate, the deceased’s creditors can file claims for money owed to them, but only against the estate. They have a limited period of time in which to do so. Assets that are not part of the estate and are not subject to the probate process are usually protected against creditor’s claims, such as life insurance policies and retirement funds with named beneficiaries. If a life insurance policy names the deceased’s estate as the beneficiary, however, the proceeds can be used toward debts.
When the executor of a will receives a claim from one of the deceased’s creditors, he has the option of paying the debt from the estate’s funds or rejecting the claim. He cannot reject a claim arbitrarily or without good cause. If a claim is rejected, the creditor has a right to file a lawsuit against the estate to try to secure payment.
Sometimes an estate simply does not have enough assets to pay all the deceased’s debts. Most states have laws that prioritize creditors to guide the executor when this happens. Loans secured by collateral, such as mortgages and auto loans, generally are paid first. The executor might have to sell assets to try to raise as much cash as possible to meet other creditors’ legitimate demands. If enough money cannot be raised to cover all the debts, each creditor usually gets a portion of what they are owed. If funds don't exist even for partial payments, the estate is considered insolvent and the executor must advise creditors of that. In this case, they probably will not be paid.
If the will’s executor errs by distributing assets before all creditors are paid or addressed, some states will hold the executor personally responsible for the portion of debt the estate can’t pay. Most states require that executors post bond, or an insurance policy against wrongdoing, for this reason. Spouses, family members or friends who were co-debtors or co-signers with the deceased might find themselves liable for that particular debt. In some states, surviving spouses might be responsible for medical bills incurred by the deceased.