Handling Estate Debt

/ March 7, 2011

Credit Card & Cash - iStockIn a recent post What Happens to Debt at Death?, Jayne Sykora explained that it is typically the decedent’s estate that is responsible for paying the decedent’s debt. Most of us are conditioned to pay a bill immediately upon receipt but when a decedent passes away, bills often go unpaid for a bit of time. It is difficult for some personal representatives to warm up to the idea that it is okay to defer payment, but the personal representative may not have a choice because access to estate funds early in the probate process is often limited. More importantly, it is imprudent for the personal representative to make such payments out of the decedent’s estate until all known creditors with claims are documented and it is guaranteed that there are sufficient assets to pay off all valid claims.

As Jayne explains in her post on personal representatives’ duties, “…the main responsibility of the Personal Representative is to take possession of and manage, protect and preserve the assets of the decedent.”[1] Personal representatives must determine if the decedent’s estate is solvent or insolvent, and if the latter, must ensure that payments of debts and distributions of assets are made in the proper order according to priority as set forth in States’ probate statutes (for Minnesota’s priority of claims, see MN Statute 542.3-805).

Personal Liability for the Personal Representative

While individuals should not be deterred from serving as personal representative, they should understand there is potential personal liability that comes with the position. If an estate is ultimately insolvent and payments are made to creditors for claims that do not have priority, the personal representative can be held personally liable for debts of higher priority that go unpaid. Therefore, personal representatives must gather the necessary information and documentation regarding the decedent’s assets and debts to have a complete understanding of the estate.

Once the personal representative has a complete understanding of the estate, they should communicate to creditors an estimated time expectancy for payments. If there is concern whether the estate will be insolvent, personal representatives should inform general creditors that payments will be delayed until it is determined there are enough assets to pay all claims. There are certain creditors, such as decedent’s homeowner’s insurance provider as well as  gas and electricity companies, that the personal representative should speak with early in the probate process to ensure specific accounts and/or services are not disrupted. If real property is being sold out of the estate, the personal representative will want to ensure that any buildings on the property remain insured and that the necessary utilities are maintained throughout the selling process.

If the personal representative determines there are enough assets to pay all debts, then he or she can begin paying off the decedent’s debts from the estate. But if there is uncertainty of whether the estate will remain solvent, the personal representative should proceed cautiously and pay debts according to the relevant State probate statutes.

[1] So You’re a Personal Representative. Now What? By Jayne Sykora