Probate is the legal process that is typically required after the death of a decedent. Most people think of probate in terms of the distribution of estate assets. However, this is only one aspect of the probate process. Have you ever wondered, for example, what happens to creditors of a decedent during probate? Few people die completely debt-free. Therefore, most decedents leave behind some creditors. Knowing how those creditors are handled during probate is important if you are directly involved in the probate of an estate.
Although we all try to live as debt-free as possible, chances are good that you will leave behind at least a few debts (e.g., home loan, car loan, etc.). Whether unsubstantial or insurmountable, these debts must be addressed during probate before any estate assets can be transferred to beneficiaries or heirs of the estate.
If you have a Last Will and Testament, the Executor you appoint will handle the administration of your estate. In the case that an individual dies without a Will, known as an intestate estate, someone usually volunteers to be the Personal Representative (PR). They do essentially the same job as the Executor. One of the first tasks of the Executor/PR is to properly notify all creditors of the decedent’s estate that the estate is being probated. How and when this is accomplished depends on what type of creditor is involved.
Creditors then have a specific period of time within which they must file a claim against the estate. Failing to file within the allotted time frame means the claim is barred. The Executor/PR then reviews all submitted claims and approves or denies each one.
Claims that are approved are paid out of estate assets. Claims that are denied may be litigated if the creditor chooses to pursue the matter. Sometimes, sufficient liquid assets do not exist to pay all approved claims. In that case, estate assets (like stocks or real estate) must be sold by the Executor/PR in order to pay the creditors. When selling estate assets fails to produce enough funds to pay all claims, claims are paid according to their priority. Debts owed to a mortgage lender, for example, must be paid before the unsecured creditors, like credit card companies.
Assets cannot be transferred out of the estate to beneficiaries or heirs of the estate until all creditor claims have been paid and/or litigated.
If you have additional questions or concerns about debts of an estate, contact the experienced Texas estate planning attorneys at The Mendel Law Firm, L.P. by calling 281-759-3213 to schedule your appointment today.