How Do an Estate’s Debts Get Paid?

An executor is the person responsible for managing the administration of a deceased person’s estate- when someone leaves a will.  If someone dies without a will- they are considered intestate and the person who assumes responsibility for administering the estate is known as the administrator.  One of the executor’s and administrator’s main jobs is to pay people or institutions to whom the estate owes money — the estate’s creditors. This can be an overwhelming task- especially when dealing with the death of a loved one- but it is essential to follow the right procedures to avoid unnecessary problems and expenses.

The first step the executor or administrator must take is to notify creditors. State law prescribes the proper way to provide notice to potential creditors of an estate. A common method of notifying unknown creditors is through publication in a local newspaper. In addition- the executor or administrator should conduct a thorough search of the deceased’s records- looking for creditors. If creditors are known– the executor or administrator must divulge this information to the Commissioner of Accounts of the Circuit Court for the jurisdiction in which they qualified as executor or administrator when filing accountings for the estate.  If the claim is undisputed- it should be paid- but if disputed- a hearing may be needed before the Commissioner of Accounts to determine whether it should be paid.

Creditors have a certain amount of time after the death to file a claim with the estate. This time period varies from state to state (for example- in Virginia- creditors have a year in which to file a claim- while in North Carolina creditors have only 90 days). Note however that many states have exceptions to the time limit for some claims- such as federal and state taxes or liens on property. Once a claim is filed- the executor can accept or reject the claim. If a claim is rejected- the creditor has the option to sue the estate.

Every state sets the priority according to which claims must be paid. The estate’s beneficiaries only get paid once all the creditor claims have been satisfied. Usually- estate administration fees- funeral expenses- support payments- and taxes have priority over other claims. All creditors in a certain group must be paid before creditors in the next priority group can be paid. If there aren’t enough funds to pay all the creditors in one group- then the payments are prorated among the creditors. If the estate doesn’t have enough money to pay all of its claims- the executor or administrator must declare the estate insolvent.

Dealing with creditor claims can be complicated. If you make mistakes as executor or administrator- it can lead to you being personally liable. It is important to have a good attorney to assist you.  However- if the court supervised process of settling the estate is followed to the letter- the executor and administrator can usually avoid personal liability for the decedent’s debts.

For more information, see this resource on estate administration.