Debts of the Estate

Being an executor of a decedent’s estate can be daunting and intimidating.  As an executor, you are handling the affairs of someone else (the person who has passed away) for the benefit of other people (the people who are inheriting the decedent’s property, that is, the beneficiaries of the estate).

Most people who are charged with the role and responsibility of being an executor want to do a good job. They want to do things correctly.

A big part of being an executor is ensuring that all the debts of the decedent are paid. Some estates have insufficient assets to pay all the debts of the decedent.  These estates are said to be insolvent, because the assets of the estate are insufficient to pay the debts of the estate.

Ironically, I find that insolvent estates, which typically have few assets, are some of the more difficult estates to administer. You would think, for instance, that an estate worth only $30,000 wouldn’t be that hard to administer, but if the decedent had $120,000 in debts and only $30,000 in assets, the administration of the estate can get sort of tricky.

There is a procedure to be followed in these instances, and the debts of the estate are given a priority as to their payment given the nature of the debt. In order to properly administer an insolvent estate, I would say that the retention of the services of an attorney are a must because a court action must be filed on behalf of the estate in order to declare the estate insolvent and have a debt payment plan approved.

But even with solvent estates, the payment of creditors can get tricky. There are odd legal phrases that when the layperson hears them, I am confident he thinks they mean something other than what they truly mean.

For instance, if you were told that creditors of the estate have nine months from the date of the decedent’s death to present their claim (or debt) and if they don’t present their claim within that nine-month period of time their claim will be barred, you would think that if, for instance, Doctor Smith doesn’t send his medical bill to the executor within nine months of the decedent’s death, then Doc Smith isn’t being paid, ever. But this is incorrect.

Creditors have nine months to present their claims to the executor following the decedent’s death. Most creditors of an estate are “contract creditors,” creditors who performed some service to the decedent pursuant to a verbal or written contract.  For instance, a medical debt would be a debt based in contract law.

A contract creditor typically has six years from the date the services were provided to sue. All the nine-month limitation period is saying is this:  If the executor waits nine months following death before make distributions of the estate to the beneficiaries, then the creditor (Doctor Smith) cannot sue the executor for making a premature distribution of the estate.  Doctor Smith could still sue on his debt if the debt isn’t paid, but if the executor waited nine months, then Doctor Smith cannot sue the executor personally for administering the estate improperly.

Of course, if the executor distributed the money to the beneficiaries, who is Doctor Smith going to sue? The estate now has no money.

If the executor did things correctly, then the executor would have taken “release and refunding bonds” from each of the beneficiaries. A refunding bond is a document that each beneficiary signs that says, in essence, if a debt of the estate is presented, I will refund to you, the executor, my proportionate share of the debt based upon the proportion by which my share of the estate relates to the debt.

So, if here are four beneficiaries each receiving an equal share of the estate and Doctor Smith’s bill is $1,000, then each beneficiary must refund $250 to the executor to pay his share of the debt. If the beneficiaries do not do this, then Doctor Smith could sue each beneficiary on the refunding bond, essentially enforcing the agreement each beneficiary entered with the executor.

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