Handling Claims in Estates When Money is Tight

Rope tied in a knot around moneyIn an earlier post, we discussed the basics of creditor’s claims. If you’re serving as a Personal Representative in an estate with claims, please start with that post and remember these fundamental principals:
  • Unsecured creditors must file a claim to get payment from an estate. The key term here is unsecured. These posts and rules don’t apply to mortgages, car loans or other secured debt. Please make sure you know the difference before determining the priority of payment.
  • In order to receive payment, creditors must file a claim in the estate. The proper procedure to do so is spelled out in the Probate Code (S.C. Code of Laws §62-3-801, et seq. covers this area of law).
  • If creditors don’t properly file a claim, the Personal Representative shouldn’t be paying them. This is a common mistake made by many – don’t do it!
Operating on the assumption that these rules have all been followed, it’s common that an estate might have several unsecured creditors (credit card, administration costs, medical bills, etc.) file claims in an estate that can’t afford to pay all of them. Now what?

First, one of the most common questions we are asked is “Is the Personal Representative personally responsible for these debts if there is not enough money to pay them?” The answer (luckily) to this question is “No.” Accepting the role of a Personal Representative does not obligate you to pay another person’s debts. If you’ve heard otherwise, it’s most likely because the Personal Representative also had another legal obligation to that debt. For example, if the parent of a minor child accepts financial responsibility for that child’s medical care then they might be liable for that debt. The fact that they later became Personal Representative for that child’s estate after death didn’t trigger that obligation, it was the parent-child relationship that did so. Another example is a co-borrower on a loan. If you sign a document agreeing to be responsible for a debt then you may become responsible for that debt if the other person dies; however, the fact that you are named Personal Representative does not obligate you. One last warning in this area, there are a lot of very shrewd creditors out there that do a fantastic job of getting people to personally assume debt they aren’t otherwise obligated to pay – don’t do it. Take all paperwork to an attorney for review and fully understand your rights before you sign anything. Doing otherwise could be a very costly mistake.

Secondly, claims that are filed must be paid according to an established priority S.C. Code §62-3-805. If the estate does not have enough assets to pay all the claims in full, this priority will guide the Personal Representative in which claims to pay first. Costs and expenses of estate administration, including attorney’s fees and reasonable funeral expenses, must be paid first. Next in line are reasonable and necessary medical and hospital expenses of the decedent’s last illness and/or medical assistance paid under Medicaid to certain individuals. Then, the Personal Representative must pay debts and taxes required to be paid under federal law, then debts and taxes required to be paid under South Carolina law, and then all other claims, in that order. A large portion of these claims falls in this bottom category of “all other claims” (such as credit card debt).

The key here is that every claim in the same category should be treated equally. For example, if two doctors submit claims for medical bills generated at the same time, they should each receive the same treatment. The Personal Representative shouldn’t refuse to pay one claim while paying the other claim in full.

Lastly, please remember that it is important where you get the assets to pay these claims. Funds for the payment of claims should always be paid from the “residue” of the estate first. If there are not sufficient liquid assets (i.e. cash, stocks, etc.) to pay all claims, then other estate assets may need to be liquidated (including real estate).

Please read our previous post on selling assets to help you know how to proceed. If there are still more creditors than there are funds available, the Personal Representative may need to pay each creditor in the same category a prorated amount based on what’s left.

If you’ve read this far then chances are that you’re dealing with a difficult estate where there is potentially more debt than assets. When that’s the case, so many Personal Representatives make the mistake of assuming they can’t afford legal counsel to help when in fact, that’s exactly what they need. An experienced estate attorney can not only guide you through this process but can often rid the estate of significant debt by understanding the process, preventing many creditors who don’t play by the rules from getting paid and negotiating down the debt to leave assets for the heirs.

​If you’re getting hassled by creditors, please call us at (800) 914-0620 for a consult today.