When a person dies, creditors can hold their estate and/or trust responsible for paying their outstanding debts. Similarly, creditors may be able to collect payment for the outstanding debts of beneficiaries from the distributions they receive from the trustee or executor/administrator. It is important for creditors to comply with California’s complex creditor’s claim statutes in a timely manner, or their claims may be forever lost. As a probate firm, Keystone can not only help creditors enforce their creditor rights by filing a creditor’s claim on their behalf but also with litigating the claims if beneficiaries or a decedent’s estate and/or trust refuse to pay.
How a creditor is repaid following a decedent’s death will depend on a variety of factors, including whether or not the debtor put down collateral or security when taking out a loan, the type of debt owed, and the size of the decedent’s estate.
It is not guaranteed that all claims by creditors will be fulfilled, as the decedent’s estate or trust may not have sufficient assets to cover all of the decedent’s debts. Where there are insufficient assets to cover the claims of all creditors, California law prioritizes the claims of certain creditors over others.
Secured party creditors are promised collateral in exchange for a loan, purchase or line of credit. Secured loans are relatively low risk to issue since creditors, without having to sue, can repossess, foreclose on or force the sale of the secured property if the debtor defaults on a payment. Examples of secured loans include mortgages and auto loans.
Unsecured creditors are not promised collateral in exchange for a loan, purchase or line of credit, which is why unsecured loans are generally risky for creditors to issue. Unsecured creditors will consider an applicant’s credit, as well as their income and savings before approving them for an unsecured loan. When debtors default on their payments of unsecured loans, their credit history and credit score can be affected. Examples of unsecured loans include credit cards and student loans.
Contingent creditors hold potential claims against debtors; however, these claims are not fixed in amount or liability. What does this mean? Since the validity of contingent creditor claims depends on a future event, which may or may not happen, it is uncertain whether the debtor, their estate, or estate beneficiaries will ever be held liable for paying off the debt.
A creditor becomes a judgment creditor after proving that they’re owed a particular debt through a legal proceeding; the party owing the debt – which in probate is either a decedent’s estate or beneficiaries of their estate – is called the judgment debtor.
Judgment creditors have an easier time collecting their debts from estates and trusts than do ordinary creditors, since they have already successfully proven the validity of their claim in court, and, therefore, are entitled to utilize the probate court to collect the debt. What does this mean? If judgment debtors refuse to pay or are unable to pay, judgment creditors can obtain court approval to foreclose on property, repossess it or force its sale.
An estate lawyer can help judgment creditors enforce their rights by helping them file their claim in court, and taking steps to force a decedent’s estate or trust to repay the debt in full.
Some debtors who anticipate death because of an illness or old age – and also anticipate that their estate will not have sufficient funds to pay both their creditors and beneficiaries – have been known to fraudulently transfer property to their would-be beneficiaries. For instance, they may liquidate their bank accounts and gift those funds to their loved ones without disclosing the transactions in order to protect the assets from the reach of creditors.
If creditors have suspicion that the debtor had perpetrated an act of fraud to hide assets from them, they should waste no time in getting in touch with a probate firm that can assist with investigating and proving the fraud claim. If the firm is successful in their arguments, the judge could order the estate to repay the debts.
The personal representative of a decedent’s estate has a responsibility to notify all known and reasonably ascertainable creditors about the debtor’s death; however, if they fail to properly carry out this duty, it is unlikely they will face any liability unless their failure was the result of intentional misleading.
No creditor should rely solely on notification from the estate, as the estate could technically wait over a year to open probate, which is after the time limit has expired for creditors to file a claim. If creditors are notified after the time limit is up, their claims could be late, and as a result, be automatically rejected.
It is best for creditors to keep tabs on their debtors and immediately enlist the help of an experienced lawyer upon learning of a debtor’s death since matters like these are time-sensitive and have the potential to get complicated.
When the personal representative of a decedent’s estate rejects or partially rejects a claim, creditors can either choose to close the claim without settling the debt or pursue further legal action by bringing the claim to court to try and obtain a judgment.
It should be noted that if the personal representative rejected the claim, they may have a valid reason for doing so (e.g., they have evidence the debt had been paid by the decedent, the creditor had made an agreement with the decedent to forgive the debt, the debt appeared fabricated) and will present their case to the court alongside the creditor. For the best chance of success, it is advisable to have a skilled law firm in your corner to help you fight what might be a challenging legal battle.
A common dispute that arises in the context of claims brought by creditors has to do with estates becoming insolvent before all of a decedent’s debts have been paid. As previously mentioned, creditors can pursue certain non-probated assets (e.g., bank accounts, trust funds) when this occurs.
While the solution seems simple enough, it should be noted that it is quite the opposite. Creditors will have to track down the deceased debtor’s non-probated assets, and, if the beneficiaries don’t agree to voluntarily part with those assets, the creditor may need litigate to compel the repayment of the debt. Without help from a qualified law firm, this process can be quite difficult. Creditors should strongly consider consulting with probate lawyers before embarking on it.
It sometimes happens that the administrator/executor of a decedent’s estate or trustee of their trust distributes assets before creditors have had an opportunity to file their creditor claims and/or litigate them. When this happens, the creditor can bring a lawsuit against the estate or trust beneficiaries to secure a judgment that would allow them to collect their debt directly from the beneficiaries.
Beneficiaries may believe that once they receive their estate or trust fund distribution, they are free to use it as they please, but they should keep in mind that their inheritances could be under threat if the executor/administrator of the estate or trustee prematurely distributed assets. If they spent their inheritance before the decedent’s creditors were paid, the decedent’s debts may transfer to them.
A probate firm can assist creditors pursuing estate and trust assets that have already been distributed.
Late claims by creditors are generally frowned upon by the court since they have the tendency to stall estate administration; however, by having a lawyer on their team, creditors can rest assured that no important deadlines will be missed. And, if a deadline is missed, the lawyer can help present a compelling argument as to why the claim should be considered anyway.
It is not a requirement for small estates to have a formal probate proceeding; if estate assets are cumulatively worth less than $166,250 (as of 2020), then property can be transferred to beneficiaries and/or surviving spouses using a Small Estate Affidavit or Spousal Property Petition, respectively.
These petitions can be problematic for creditors, since a debtor’s estate could be settled before the creditor even learns of the debtor’s death. If this is the case, the creditor, with help from a probate firm, can argue for the right to collect the inheritance directly from beneficiaries and/or the surviving spouse.
Things can get complicated for creditors who are not trying to collect judgments from a decedent’s estate but from the beneficiaries of an estate or trust who owe a debt. These types of creditors are sometimes called creditor beneficiaries. If creditors get wind that a non-paying debtor is due to receive an inheritance by means of a will or trust, a probate firm can help the creditor petition the court to intercept it.
When it comes to creditor disputes, there are several ways in which Keystone can help. Our lawyers can assist with any step of the claims process or handle the entire process on the creditor’s behalf.
Here are some of the specific ways in which Keystone’s probate lawyers have assisted their creditor clients: