What Are the Creditor Rights of a Decedent’s Creditors?
The most foolproof way for creditors to ascertain debts get repaid, even after the debtor’s death, is to keep tabs on debtors. Creditors often miss out on opportunities to enforce their creditor rights because they find out too late about the debtor’s death, and the window has closed for filing a claim.
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Right to Notification
It is the duty of the personal representative (i.e., the administrator or executor of the estate) to notify the decedent’s known or reasonably ascertainable creditors about the decedent’s death. The personal representative must issue a Notice to Creditors, which usually runs in a public forum, such as a newspaper. Personal representatives must notify creditors within the later of:
- 4 months after the date the letters of administration are issued; or
- 30 days after learning about the creditor
If the personal representative fails to notify creditors within the aforementioned time period, the court may rule to allow the creditor to enter a late claim. This is best accomplished with help from a creditor rights law firm. Spouses who are creditors may also be permitted to bring a late claim against the deceased for breach of fiduciary duty.
It is important to note that unless the error by the personal representative was made in bad faith, they will likely not be held personally liable for paying any damages.
Some reasons why the probate court might accept a late claim by a creditor include:
- Personal representative failed to send the creditor proper and timely notice, and the creditor files their claim within 60 days of the creditor learning about the decedent’s death; or
- The creditor had no knowledge of the facts, giving rise to the existence of the claim more than 30 days before the time for filing a claim, and the petition is filed within 60 days after the creditor has actual knowledge of both of the following:
Estoppel and Fraud Defense
An estoppel is a legal defense available to a party to prevent an opponent from making seemingly untrue assertions or going back on their word.
In the context of a decedent’s creditors, it could mean that the personal representative of the decedent’s estate or their attorney led the creditor to believe that the estate was going to pay a debt without the creditor filing a claim or that the claim did not need to be filed until a later date that fell after the deadline for filing a claim.
In such a scenario, the personal representative could be estopped from arguing that the claim by the creditor is time-barred.
It is important to note that a court’s ability to accept a late creditor’s claim is limited to situations in which the late claim is filed before the one-year statute of limitations. This rule also applies to creditors seeking to continue an action that was pending against a decedent when they died. Personal representatives, in turn, will have standing to defend the pending action if they so desire.
If the one-year statute of limitations elapses before the late claim is filed, the claim is basically gone. The defenses of estoppel and fraud would be the creditor’s only remaining options for requesting that the court consider a late claim. Creditors seeking to use estoppel or fraud as cause for filing a late claim should do so with help from a creditor rights law firm.
Right to File a Creditor’s Claim
Creditors have a right to file a creditor’s claim, regardless of whether or not they are properly notified about the decedent’s death by the personal representative of the decedent’s estate. It cannot be stressed enough how important it is for creditors to file their claims as soon as possible after a debtor dies.
If creditors are not owed a debt by a decedent but by a beneficiary of a decedent’s estate or trust, the creditor beneficiary, as they are sometimes called, may be entitled to intercept the beneficiary’s inheritance for repayment.
It’s worth noting that not all claims against the decedent will need to go through the formal creditor’s claim process. A creditor rights law firm can help determine which claims must be entered formally.
Debts the Estate Will Have to Pay
It is crucial for personal representatives to retain sufficient funds from the estate to pay:
- Administration expenses
- State and federal taxes
These claims take priority over the claims of other creditors, and to ensure the estate has enough funds after assets are distributed to pay these debts, many executors and administrators will open a separate estate bank account to hold the funds until it is time to pay them.
Debts That Must Be Paid Immediately
As opposed to administration expenses, and state and federal tax, certain debts must be paid by the personal representative of the estate as soon as funds become available.
These debts include:
- Funeral expenses
- Last illness costs (i.e., medical costs associated with the illness from which the decedent died)
- Family allowance (i.e., allowances provided to financially dependent family members of the decedent to cover their expenses while administration takes place)
- Wage claims (i.e., wages the decedent owed employees or contractors)
Right to Hold Personal Representatives Liable
In general, personal representatives, such as executors and administrators, are not held liable if a decedent’s debts are not paid. There are, however, a few exceptions to this liability rule, such as when it is proven that the executor or administrator mismanaged the assets of the estate.
Community Property and Debt
Often, the executor or administrator is the surviving spouse. In California, which is a community property state, both property and debt acquired over the course of a marriage are generally owned equally by both spouses; therefore, if the funds of the estate are insufficient in covering the decedent’s debts, the spouse could be held liable for repaying them unless they can successfully prove that the debt was a separate debt rather than a community debt. In most cases, the surviving spouse’s separate property will remain protected against creditors.
Right to Contest Rejected Claims
If a creditor has a claim that is rejected by the personal representative of a decedent’s estate, the creditor can enforce their creditor rights by seeking the help of a creditor rights law firm to litigate their claim and obtain a judgment. It is important for creditors to bring their lawsuit within 90 days of their claim being rejected.
If creditors provide enough evidence to support their claim and validate it, the court will enter a judgment ordering the estate to pay the creditor. At this point, the creditor will have substantially more freedom in the avenues they pursue to collect the debt.