Determine estate solvency
When settling an estate through the legal probate process, the executor or administrator is responsible for paying the bills and debts of the estate.
A solvent estate is an estate that has enough assets to cover all outstanding debts.
If the total value of the deceased’s debt is greater than the total value of its assets, the estate is considered “insolvent.”
Important
When an estate is insolvent, state law determines how the estate will be settled and the order in which bills must be paid.
First, the probate court in the county and state where the deceased lived will have to officially declare the estate insolvent. Then, the probate court will determine the priority of payments to people and organizations who are owed money by the estate.
This means some debts will have to be paid before others, and some debts may not get paid at all. Payment priorities differ in each state, but are typically made in this 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
Before declaring an estate “insolvent,” it is important to determine if certain assets can be sold to pay outstanding debts and avoid insolvency because the probate court may require an estate to sell assets to avoid insolvency.
Providers
Consult a probate attorney before taking this step because there are specific procedures in each state to declare an estate “insolvent.” Since the rules that govern insolvent estates differ by state, speak with them to better understand the laws of the state where the deceased lived to determine the priority of debts.
Helpful Tips
Who is responsible for the deceased’s outstanding debts?
While debt collectors may attempt to contact family members of the deceased to collect payment, they are usually not liable for the deceased’s debts.
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.
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
If the estate is responsible for any outstanding loans, 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.).
How does the Fair Debt Collection Practices Act protect the surviving family?
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 and report it to the FTC.
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]
How are insolvent estates managed in Community Property states?
Community property is essentially everything that spouses acquire and own together over the course of their marriage.
For instance, if Jane and John Doe were married in 2020 and purchased a home in 2021, their home is considered community property.
Even if John Doe passes away, Jane Doe will still be responsible for paying for their home.
If John Doe owned an apartment before he married Jane, however, and the two never lived in the apartment during their marriage, the apartment might be considered a separate asset of John’s.
Important
When a deceased person was married and lived in a community property state, their surviving spouse is responsible for all debts acquired during the marriage after their death.
Let’s say John and Jane Doe are married, and John purchased a car, in his name, during their marriage. If John and Jane live in a community property state, Jane is also an owner of the car, even if her name was not on the car title. If John passes away, Jane will be responsible for any car payments and insurance for the car.
Important
If the deceased person died with debts greater than the value of the assets (an insolvent estate), their surviving spouse may be personally responsible for paying the debts of the deceased, if those debts were acquired during their marriage.
Providers
If the deceased lived in a community property state and has an “insolvent” estate, the executor may need to consult with a probate attorney. The probate attorney can help the surviving spouse determine which debts of the deceased they will be responsible for paying. In extreme situations where the surviving spouse does not have enough money or assets to pay the deceased’s debts, they may have to speak with a bankruptcy attorney.
List of Community Property states
- Arizona
- California
- Idaho
- Louisiana
- Nevada
- New Mexico
- Texas
- Washington
- Wisconsin
Personal Considerations
Did the deceased have debts?
Record all bills and debts owed to persons or organizations by the deceased, including the balance due.
This will help the executor or administrator determine the total amount of due owed to creditors.
Also, record whether the debt is secured or unsecured, as this may affect the priority of re-payment.
Secured vs. Unsecured Debt Secured debt is debt that is backed by collateral, which the lender can collect if payments are not made in accordance with the loan.
For example, a mortgage is a secured debt. A lender can foreclose on a house if the homeowner stops making payments in accordance with their mortgage loan.
Vehicle loans also tend to be a secured debt, as the lender can repossess the vehicle if the borrower stops making payments in accordance with the car loan.
Important
Typically, secured debt must be paid before unsecured debt.
Unsecured debt is not backed by collateral, so there is typically nothing for the lender to repossess if the borrower stops making payments.
However, the lender may file a collections lawsuit against the borrower in order to collect the money they are owed.
Credit card debt is a common example of unsecured debt. Normally, unsecured debt is only paid after secured debt has been paid.
Ensure the executor or administrator of the deceased’s estate thoroughly reviews the deceased’s accounts in order to determine if any bills or debts were owed.
Important
It is highly unlikely that an individual does not have any bills or debt.
If the deceased did not have any debt, the estate is most likely “solvent.” This means that the estate has enough assets to pay any debts of the estate.
If the estate has assets but no debts, the heirs and beneficiaries of the estate will likely receive the total value of estate assets, as there are no bills or debts to be paid.
Thoroughly review the deceased’s accounts to determine if the estate had any debts.
Record all bills and debts owed to persons or organizations by the deceased, including the balance due.
This will help the executor or administrator determine the total amount of due owed to creditors.
Also, record whether the debt is secured or unsecured, as this may affect the priority of re-payment.
Secured vs. Unsecured Debt Secured debt is debt that is backed by collateral, which the lender can collect if payments are not made in accordance with the loan.
For example, a mortgage is a secured debt. A lender can foreclose on a house if the homeowner stops making payments in accordance with their mortgage loan.
Vehicle loans also tend to be a secured debt, as the lender can repossess the vehicle if the borrower stops making payments in accordance with the car loan.
Important
Typically, secured debt must be paid before unsecured debt.
Unsecured debt is not backed by collateral, so there is typically nothing for the lender to repossess if the borrower stops making payments.
However, the lender may file a collections lawsuit against the borrower in order to collect the money they are owed.
Credit card debt is a common example of unsecured debt. Normally, unsecured debt is only paid after secured debt has been paid.
Ensure the executor or administrator of the deceased’s estate thoroughly reviews the deceased’s accounts in order to determine if any bills or debts were owed.
Important
It is highly unlikely that an individual does not have any bills or debt.
If the deceased did not have any debt, the estate is most likely “solvent.” This means that the estate has enough assets to pay any debts of the estate.
If the estate has assets but no debts, the heirs and beneficiaries of the estate will likely receive the total value of estate assets, as there are no bills or debts to be paid.
Thoroughly review the deceased’s accounts to determine if the estate had any debts.
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.
In general, estate 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 typically 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 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.
The executor or 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.
In general, estate 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 typically 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 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.
The executor or administrator will need to pay all bills and debts owed by the deceased during the legal probate process.
Providers to Contact
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 if the estate is unable to pay its debts.
Probate Attorneys Near You
Probate attorneys help settle a deceased person’s estate. They can help you determine if the deceased’s estate is insolvent, and file necessary paperwork with the Probate Court if the estate is not able to pay all debts.
