What Is an Insolvent Estate?

By Beverly Bird

It's not unusual for someone to have more debts than assets. If this is the case when you die, your estate is insolvent. Your beneficiaries and heirs generally won't inherit your debts, but the executor or administrator of an insolvent estate must take at least one additional step as part of the probate process.

Permission of the Court

Your estate can't file for bankruptcy, but a somewhat similar procedure exists if you die in debt. When your executor ascertains that there's not enough money to pay everyone, she must typically file a petition with the court, alerting the judge. The judge then issues an order, detailing which debts can be paid from your available money and from liquidation of your property.

Order of Payment

If you die owing taxes – or any other debt to the federal government – it is paid first. The costs of operating your estate are usually paid next, followed by expenses associated with your burial or final illness. The exact order can vary somewhat from state to state, but generally, your unsecured debts – such as credit cards – are paid last. If the money runs out before these creditors receive payment, they don't get paid. Otherwise, they share whatever is left on a pro rata basis. For example, if there's $10,000 left in your estate, but your debts total $100,000, each creditor would receive 10 cents for each dollar you owe him.

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Exceptions to the Rules

If anyone cosigned a debt with you, they become responsible for it when you die. If you live in a community property state, your spouse may be responsible for your debts if you incurred them while you were married. Secured creditors typically receive their collateral back.

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References

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What Is the Meaning of Settle Estate?

A Last Will and Testament contains instructions for the distribution of a person's assets, also referred to as the estate, when he dies. The will names a specific person, known as the executor, to act as the estate's representative. The executor, sometimes referred to as the administrator, must collect the decedent's assets, pay his debts and estate taxes, and distribute his remaining assets to the heirs named in the will. This process, called settling the estate, occurs under the supervision of the state probate court.

Who Gets Paid First Out of a Deceased's Estate?

Probate is the process of settling a decedent's estate under court supervision. State law may establish an informal probate process for small estates. The executor named in a person's will -- who may be called a personal representative in some states, or an administrator if court-appointed -- must gather and preserve the estate assets and then pay the decedent's debts and taxes before distributing any remaining assets of the estate to the beneficiaries, once the creditors are paid.

Does an Executor Have to Assume Unpaid Debt in Michigan?

The executor of an estate has a great deal of responsibility in Michigan and elsewhere. Personally assuming the decedent's unpaid debts usually isn't required, however. If you ask someone to serve in this capacity and name her as executor of your estate in your will, she has some say over who gets paid and who does not, but she would not have to reach into her own pocket to pay your debts, except in certain rare circumstances.

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