Understanding Estate Planning – Priority of Estate Debts

Understanding the priority of estate debts is essential to the administration of a probate estate. Anytime someone dies leaving debts, it’s natural for family members to wonder how those debts get repaid. The priority of estate debts is not something most people have to worry about, but understanding the priority can make the probate process a lot easier, regardless of what role you play.

Estate Administration and the Priority of Estate Debts

When a person dies leaving behind property, someone must take control of the property and see that it goes to its rightful new owners. This process, known as probate or the estate settlement process, is governed by a variety of state-specific rules and laws. A court appoints an estate administrator to whom creditors who believe the decedent owed them money can submit claims.

The administrator’s job is to manage the estate property and establish which claims are valid.  State law then establishes the priority of debts and determines which creditors get paid first.

Priority, Insolvency, and Repaying Estate Debts

The process of paying estate debts is not difficult, but it requires an administrator to take specific steps. First, the administrator notifies creditors to file their claims, if any.  Then the administrator must determine which claims are valid and which are not. After that, the administrator must determine if there is enough money in the estate to pay all the creditors. If an estate has fewer assets than debts, the estate is insolvent. This means at least one creditor will not be fully paid.

This prioritization of payment of estate debts exists primarily because of this possibility of insolvency. If an estate has enough assets to pay all creditors, there won’t be a problem.  With an insolvent estate, there will be unpaid creditors. The rules on priority of payment of estate debt determine which creditors get paid and which do not.

Family Payment of Estate Debts

Most estate creditors file an estate claim to get paid. Some, however, will try to skirt this process. Creditors may contact relatives of a deceased person to try to convince them to pay the unpaid debt.

Family members of a deceased person are never responsible for paying that person’s debts. The main exception to this rule is if the family member had a joint debt with the deceased. If creditors contact you to try to get you to pay a deceased person’s debts, please call us for advice.