Generally, an individual's death does not extinguish creditors' claims, but creditors must act quickly to assert their claims against an estate to avoid losing their rights forever. Every state has its own laws on probate procedures, including how estate creditors are to be handled. The person who is administering the estate, often called the personal representative, is supposed to notify creditors that the deceased has died so that the creditors can make claims against the estate.
It's fairly easy for a personal representative to identify creditors if the deceased has left paperwork showing the amount of debt, but if creditors make claims that aren't shown in the deceased papers, things can get more complicated. The personal representative has to be very careful, because he or she might be personally liable if creditors aren't paid properly or if estate assets are paid out on invalid claims. If the personal representative approves a creditor's claim, the bill is paid out of the estate assets. If the claim is rejected, creditors may sue the estate to obtain payment, which can cause much delay and expense.
The way this notice is given varies from state to state. In California, you have a duty to notify both known and reasonably ascertainable creditors of the death of the decedent and that you have been appointed as personal representative. This includes not only creditors with outstanding bills such as doctors, credit card companies and utility companies, but also people who may have a potential claim against the decedent on account of something that happened during the decedent's lifetime. For example, if the decedent was involved in an auto accident in the year prior to his or her death, or if you learn that someone, even if that person is a relative, may have loaned money to the decedent and may expect to receive payment from the estate, you should notify those persons that probate has begun.
How is notice to creditors given in California? The personal representative must complete the front and reverse side of a Notice of Administration to Creditors (Form DE-157, Judicial Counsel). Include on the reverse side the name and address of each creditor or potential creditor who is to get notice. If you discover additional creditors at a later date, you can send them a copy of the form, but you must use a new form that shows the correct date of mailing. You cannot mail the forms yourself - ask someone else to do the actual mailing for you, and have that person complete and sign the Proof of Service by Mail on the reverse side of the form.
You must mail to the creditor a photocopy of the signed Notice of Administration to Creditors form, together with a copy of a blank Creditor's Claim form (Form DE-172, Judicial Council).
You should mail notice to creditors within the later of:
Four months after the date Letters are first issued, or
Thirty days after you first have knowledge of the creditor (even if four months has already passed).
Once the creditor files a claim against the estate, the personal representative will either pay the debt or dispute it in whole or in part. Once the personal representative provides notice to the creditor that the estate disputes the debt, the creditor must file suit within 90 days of the rejection. Creditors should remain vigilant so as not to miss a deadline.
Public agencies may have a claim as well:
The personal representative is required to put the California Department of Health Care Services on notice if the personal representative believes the decedent may have been on Medi-Cal. It is good practice to put them on notice in all cases.
The personal representative is required to put the Director of the California Victim Compensation and Government Claims Board on notice if the personal representative (or "estate attorney") knows or has reason to believe that an heir is confined in a prison or facility under the jurisdiction of the Department of Corrections and Rehabilitation or confined in any county or city jail.
The personal representative is required to put the California Franchise Tax Board on notice within 90 days of Letters issuing.
Once the personal representative has determined how many valid claims there are against the estate, he or she must see if there are enough assets to pay these debts. If there aren't enough assets to cover the debts, the estate is said to be insolvent. Each state has laws about how property is to be distributed in an insolvent estate. For example, federal and estate taxes may be paid first, followed by probate expenses, funeral and last illness costs, and general creditors.
If there aren't enough funds left over to pay all the creditors in one group, the amount left will be prorated to creditors in the group. For example, in the example just given, if there is enough property to cover taxes and probate costs, but only enough to pay part of the funeral and last illness expenses, the remaining assets will be prorated to creditors in that group. If the funeral expenses were $15,000 and the last illness expenses were $30,000, and the amount remaining to pay the creditors in that group is $10,000, 1/3 will go for funeral expenses and 2/3 for last illness expenses. Because the assets are all used up, the creditors in the next group, general creditors, will get nothing.
If you have any question as to whether the bill is valid or whether you will be able to pay all of the decedent's debts in full, you should wait until the end of the claim filing period (the later of four months after Letters were first issued, or sixty days after the last Notice of Administration was mailed) to determine the total amount of creditor's claims filed against the estate.
If an estate is insolvent, the beneficiaries will also get nothing, even if a will leaves them specific property or specified sums of money. Beneficiaries can only receive assets in probate if there are enough assets left over after all legitimate debts have been paid. If there is not enough money to continue to make regular payments, you should seek the advice or assistance of an attorney to find out what your alternatives are to avoid foreclosure and protect any equity the decedent or the estate may have in the property.
Probate is often complicated and confusing, and can seem overwhelming at times. How to treat creditors and probate notice requirements in general may be difficult to understand. You may not know what to do. That is where I can be of help. I make a difficult and bewildering probate process as simple as possible. If you wish to gain more information on California probate please contact me for a free consultation. I will spend time with you to answer your questions. From my office in Southern California, I represent families in all Southern California counties, including Imperial County, Los Angeles County, Orange County, San Bernardino County, San Diego County, others spread across the state and interested parties outside California.
To schedule a consultation, call me toll free at 800-575-9610 or locally at 760-989-4820. I enjoy meeting in person whenever possible, but am also available via Skype and email or through my online contact form.