Creditors may make both informal and formal claims against an estate. An informal claim is one in which the creditor simply sends a bill to the decedent, which is forwarded to the executor. Executors may typically pay these bills without a formal process (or keep intact automatic bill payments). However, creditors also have the ability to make formal claims against the estate. Executors have a duty to review all creditor claims and pay valid debts.
Formal Creditor Claims
Once a probate case is opened for an estate, creditors have the right to make formal claims against the estate. The time limit for creditor claims varies by state, but it is usually a few months after the creditor is notified of the death. (The federal government is not bound by state creditor deadlines.) An executor is responsible for notifying all creditors of the probate case. A creditor may also reach out to the executor or to the probate court to determine if an estate is being probated. The exact process to file a creditor claim with the court varies by state, but a creditor will generally be required to state under oath the exact debt owed and provide details and evidence of the debt and any payments on the debt. If an executor does not pay a creditor’s claim, the creditor has a certain amount of time to dispute the rejection with the court. An executor may be required to file a list of paid and unpaid creditors’ claims with the court before they may close the probate case.
An estate’s creditors may include:
Funeral and burial service providers
Lawyers, accountants, and other professionals
Tax collecting bodies
Credit card companies
Heirs and devisees
If an estate does not go through probate, creditors may still be entitled to make claims against inherited property. Inheritors are liable for estate debts up to the value of what they inherited. For example, an individual who inherits $5,000 from an estate will only be liable for that estate’s debts up to $5,000 total. However, not all property that does not pass through probate is available to creditors. For instance, life insurance proceeds and retirement accounts are generally not subject to creditor claims. Creditors may be less likely to make claims against inheritors than the estate, but probating an estate may offer additional protections for inheritors by securing an official creditor claim deadline.
Paying Creditor Claims
An executor should use the estate’s checking account to pay any valid creditor claims and keep a record of these payments. To save the estate money while ensuring that a debt is at least partially paid, an executor may be able to reach an agreement with a creditor to discharge the debt for less than its face value. Some debts, like student loans, may not need to be repaid. If the estate does not contain enough liquid assets to pay valid debts, an executor may need to sell estate assets. Some estate assets, such as property protected by a homestead or family allowance or a property held in joint tenancy, may be protected from an estate’s debts. If the estate still does not have enough funds to pay legitimate creditor claims, state law will determine which debts have priority for payment. Some creditors may not collect anything. An estate that cannot pay all of its debts is called an insolvent estate.
Executors are not generally liable for an estate’s debts unless they personally held debts with the decedent or their carelessness in handling the estate’s assets caused its inability to pay its debts. Spouses of decedents are also not usually liable for an estate’s debts unless they incurred those debts together with the decedent, or the debt is otherwise considered community property.