Once an executor or administrator has been appointed to an estate, one of their first tasks is to pay off debts the deceased owed at the time of his or her death.
If the estate has enough assets to cover these debts, the executor or administrator is charged with paying all administration expenses and legitimate debts before distributing the estate assets to the beneficiaries.
However, many times, there is simply not enough to cover these expenses. When someone dies with more debt than assets, their estate is considered to be insolvent.
Read on to see what happens when the deceased’s estate is insolvent and not able to cover outstanding fees and debts.
Handling an Insolvent Estate
The first step the executor or administrator will need to take is to assess what debts are out there. If possible, the estate should pay for the debts incurred by the deceased during his or her lifetime. Many of these debts include but are not limited to the following:
- Mortgage on the deceased’s home or any outstanding payments on a lease;
- Child support and alimony;
- Past-due taxes;
- Any contractual or financial obligations the deceased still owed at the time of his or her death.
It helps to know what order obligations need to be paid in, so we recommend looking into the state priority laws when paying off any debts. Obligations that are tied to a piece of property, such as a home or vehicle, will go along with those pieces of property.
Life Insurance Policies
Another recommendation is to check to see if any debt has a life insurance policy connected to it. The purpose of these life insurance policies is to pay off the debt upon the death of the debt-holder.
Sometimes a mortgage will have a life insurance policy attached to the debt which is intended to pay off the house in the event the debtor dies before the debt is paid in full. Also, check to see if any agreements were made as to what would happen to the debt if the debtor died. These agreements are not always there, but occasionally they may be.
The executor or administrator should always first verify the validity of the claims against the estate. A proposed debt should never be paid blindly without first making sure that the claim is, in fact, valid.
Also, the debt should be verified that it is legally enforceable. For instance, if the debt is past the statute of limitations and could not have been legally collectible if the deceased were alive, the debt cannot be pursued after his or her death.
Every state has exceptions to statutes of limitations, as well as federal law on certain federal claims so never assume that all debts fall under the general statute of limitations.
Georgia law allows a certain amount of property be exempt from creditor’s claims. Normally, the exempt amount is the value of one year of the deceased’s financial support for his or her family. This amount will be protected first before claims are paid.
Certain debts will take priority in payment over others. Georgia probate law requires that the deceased’s funeral expenses must be paid first, followed by expenses associated with the estate administration, including court fees, legal fees, accounting fees, and executor compensation.
The next expenses that must be paid are those associated with the deceased’s final illness, followed next by state and federal taxes. After these debts are paid, any judgments, liens or secured financial loans must be paid. Only after that point will unsecured debts be paid, if at all.
These above-mentioned claims are given priority and must normally be paid in full before other claims will be paid. However, if the estate is determined to have more claims than assets to pay the claims, the estate will then be declared insolvent.
Each debt must be paid in full before the debt that is considered next in line will be paid, and if one debt is paid in the priority list, leaving no other assets to pay the remaining debts, those remaining debts will not be paid.
Petition for Discharge
After all debts are dealt with appropriately and paid per the estate’s limits, if it is determined that the estate is insolvent and not able to pay off the remaining debts, the executor or administrator files a Petition for Discharge to close the estate.
Once this Petition is granted and an order issued, any remaining debts or unpaid creditors will then be discharged. The executor or administrator will also be discharged from his or her position and any liability to the estate. After this point, any unpaid creditors will be prevented from pursuing a claim against the deceased’s estate.
Contact Brian M. Douglas, LLC Today!
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