Determine estate solvency
A solvent estate is one that can cover all of its outstanding debts. How an estate is settled through the legal probate process depends on its ability to pay its debt.
If the total value of the deceased’s debt is greater than the total value of its assets, then the estate is considered insolvent and it cannot pay its final bills.
In these cases, state law will determine how the estate must be settled, including the priority for paying the estate’s debts.
Good to Know
First, the probate court in the county and state where the deceased lived will have to officially declare the estate to be insolvent. Then, the probate court will determine the priority of payments to creditors, including which debts must be paid before others.
Review the laws of the state where the deceased lived to determine what happens if the estate is insolvent.
Important
Before declaring an estate insolvent, it’s important to determine if certain assets can be sold to pay outstanding debts and avoid insolvency.
Consult a probate attorney before taking this step, because there are specific procedures to declare insolvency.
Typically, most states require that the executor file a “petition” with the probate court requesting the court declare the estate “insolvent.”
However, these rules and procedures vary by state, so review the laws of the state where the deceased lived to determine whether and how an estate can be declared “insolvent.”
Helpful Tips
What is the priority of payments to creditors?
Payment priority differs from state to state, but are often made in this order:
- Funerals - any products and services purchased for funeral or memorial services, including burial and cremation
- Family - payments needed for the ongoing support of the deceased’s dependents (e.g. spouse, children)
- Estate Administration - costs for settling the Estate, including court fees, attorney’s fees, and the upkeep of estate property
- Government - any outstanding payments owed to state or federal government including back taxes, interest, or penalties
- High Priority Creditors - expenses related to high priority creditors to whom the deceased owed payment (e.g. home mortgage)
- Medical - expenses related to the medical support of the deceased (e.g. hospital or hospice care)
- Unpaid wages - outstanding payments owed to employees of the deceasedUnsecured debt - additional debt the deceased had including credit card debt and payday loans
How are the deceased's debts paid?
In general, the deceased’s estate is responsible for any debts left solely in the name of the deceased.
If the deceased had loans with a co-signer who survived the deceased, the co-signer will be solely responsible for paying the remaining balance of those loans according to the terms of the loan.
Important
Also, if you are the spouse of the deceased living in one of nine community property states in the United States, you will be responsible for any outstanding bills, loans, or debt that were in the deceased’s name, as long as those bills and debt occurred during the marriage.
For example, John and Jane Doe were married on January 1, 2010. John Doe had a loan from July 2009 and a loan from September 2010.
The loan John incurred in 2009 is not considered community property because it was incurred prior to marriage. The loan from September 2010 would be community property because it was incurred during John’s marriage.
Good to Know
If the estate is responsible for any outstanding bills or debt because there is no co-signer or surviving spouse in a community property state, the executor of the estate will be responsible for paying those debts out of any assets left in the estate (e.g. bank account of the deceased, real property, life insurance, etc.).
The Fair Debt Collection Practices Act (FDCPA) protects individuals from abusive or deceptive bill collection practices.
The act limits who a collector can contact regarding the debts of a deceased person. According to the FDCPA, collectors can only contact and discuss the deceased’s outstanding debts with:
- The spouse of the deceased,
- The parents of the deceased if the deceased was a minor child,
- The legal guardian of the deceased, and/or
- The executor of the deceased’s estate.
If you are contacted by a debt collector and you are not the spouse, parent, legal guardian, or executor of the deceased’s estate you should notify the collector, in writing, that their activity violates the FDCPA.
How to handle abusive debt collectors
The Fair Debt Collection Practices Act (FDCPA) protects individuals from abusive or deceptive bill collection practices.
The Act limits who a collector can contact regarding the debts of a deceased person. According to the FDCPA, collectors can only contact and discuss the deceased’s outstanding debts with:
- The spouse of the deceased,
- The parents of the deceased if the deceased was a minor child,
- The legal guardian of the deceased, and/or
- The executor of the deceased’s estate.
If you are contacted by a debt collector and you are not the spouse, parent, legal guardian, or executor of the deceased’s estate you should notify the collector, in writing, that their activity violates the FDCPA.
Template to Notify Collectors of FDCPA Rights
If you are contacted by a debt collector and you are not the spouse, parent, legal guardian, or executor of the deceased’s estate you should notify the collector, in writing, that their activity violates the FDCPA and report it to the FTC.
[Enter Date] [Collector Name] [Collector Address] RE: Your contact with me on [Date of contact]
To Whom it May Concern:
Please be advised that [name of deceased] passed away on [date of death]. I was contacted by your agency on [date] regarding a debt owed by [name of deceased]. Please be advised that I am not the surviving spouse, parent, legal guardian, or executor of the deceased. According to the Fair Debt Collection Practices Act (FDCPA), you do not have the legal authority to contact me regarding this debt.
As such, do not wish to receive any further communications from your agency regarding this debt. If you believe I am mistaken and somehow liable for the deceased’s debt, please respond to this letter with verification that you have the authority to contact me.
Sincerely,
[your name] [your address]
Personal Considerations
Does the estate have debts greater than the value of its assets?
The estate is considered “insolvent.” Estate assets may need to be sold in order to pay for the estate’s debts, in order of their priority.
The priority in which estate debts must be paid is determined by state law in the state where the deceased lived.
Ordinarily, estate state debts will need to be paid before assets can be given to the deceased’s heirs and beneficiaries.
This means there may not be any estate assets left to give to the deceased’s heirs.
Estate debts must usually be paid in the following order:
- Funeral and memorial expenses
- Payments needed for the ongoing support of dependent family members
- Estate administration costs, such as court fees and attorney fees
- Government debts, such as state or federal taxes, interest, and penalties
- High-priority creditors, such as a mortgage or car loan
- Medical expenses of the deceased
- Unpaid wages to employees of the deceased
- Unsecured debts, such as credit card debt
Important
While debt collectors may attempt to contact family members of the deceased in an attempt to collect payment, they are typically not liable for the deceased’s debts.
The deceased’s family members may be personally responsible for paying debts of the deceased if:
- The loan was signed with a co-signer or joint account-holder other than the deceased (the surviving account holder is now responsible for the debt)
- The deceased lived in a community property state and has a surviving spouse
Co-signed loans and community property will probably not be considered part of the deceased’s estate.
Good to Know
However, in some rare circumstances, a co-signed loan may stipulate that the deceased’s estate, and not the co-signer, is liable for repayment of the debt. Review the deceased’s loan documents to determine if this applies to the deceased’s estate.
Otherwise, co-signed loans and community property that are not the responsibility of the estate will not count toward the debts of the estate (and may keep the estate from being insolvent).
The estate is considered “solvent” and will need to pay all bills and debts owed by the deceased before assets can be given to heirs and beneficiaries.
After the estate’s bills and debts have been paid during the probate process, assets can be given to heirs and beneficiaries according to the deceased’s will or state law.
The executor of administrator will need to pay all bills and debts owed by the deceased during the legal probate process.
The estate is considered “insolvent.” Estate assets may need to be sold in order to pay for the estate’s debts, in order of their priority.
The priority in which estate debts must be paid is determined by state law in the state where the deceased lived.
Ordinarily, estate state debts will need to be paid before assets can be given to the deceased’s heirs and beneficiaries.
This means there may not be any estate assets left to give to the deceased’s heirs.
Estate debts must usually be paid in the following order:
- Funeral and memorial expenses
- Payments needed for the ongoing support of dependent family members
- Estate administration costs, such as court fees and attorney fees
- Government debts, such as state or federal taxes, interest, and penalties
- High-priority creditors, such as a mortgage or car loan
- Medical expenses of the deceased
- Unpaid wages to employees of the deceased
- Unsecured debts, such as credit card debt
Important
While debt collectors may attempt to contact family members of the deceased in an attempt to collect payment, they are typically not liable for the deceased’s debts.
The deceased’s family members may be personally responsible for paying debts of the deceased if:
- The loan was signed with a co-signer or joint account-holder other than the deceased (the surviving account holder is now responsible for the debt)
- The deceased lived in a community property state and has a surviving spouse
Co-signed loans and community property will probably not be considered part of the deceased’s estate.
Good to Know
However, in some rare circumstances, a co-signed loan may stipulate that the deceased’s estate, and not the co-signer, is liable for repayment of the debt. Review the deceased’s loan documents to determine if this applies to the deceased’s estate.
Otherwise, co-signed loans and community property that are not the responsibility of the estate will not count toward the debts of the estate (and may keep the estate from being insolvent).
The estate is considered “solvent” and will need to pay all bills and debts owed by the deceased before assets can be given to heirs and beneficiaries.
After the estate’s bills and debts have been paid during the probate process, assets can be given to heirs and beneficiaries according to the deceased’s will or state law.
The executor of administrator will need to pay all bills and debts owed by the deceased during the legal probate process.
Providers to Contact
Probate Attorneys Near You
Probate attorneys help settle a deceased person’s estate. They can help you determine whether the estate is insolvent and file necessary petitions with the probate court.
Debt Settlement Attorneys Near You
Debt settlement attorneys help debtors negotiate with creditors. They can help you negotiate new payment terms and potentially settle a debt for less than is owed.
Certified Public Accountants Near You
An accountant is a professional who specializes in financial record keeping. They can help you manage the finances of an estate, including its assets, debt and tax filings.
