If you’re the Personal Representative of an estate in a probate matter, you should know that death does not automatically eliminate the decedent’s debts. If you want to understand how to handle creditors in probate, you must learn how to properly provide notice to creditors, respond to creditors' claims, and negotiate with creditors.
COMMON ESTATE CREDITORS. Common estate creditors include the government (the IRS, the Washington State Dept. of Revenue, and the Washington State Dept. of Social and Health Services) and both secured and unsecured debt.
Secured debts are attached to collateral which the lender can seize, sell, and use to pay back the debt if the borrower defaults on payments. Real estate mortgages and car loans are examples of secured debt.
Unsecured debt lacks collateral, like credit card debt and student loan debt. Unsecured debt is a lower priority creditor in an estate administration.
REQUIREMENTS FOR CREDITORS TO MAKE A CLAIM. Under the Uniform Probate Code, creditors must file a claim within the latter of:
(1) Four months after the first date of publication of the Probate Notice to Creditors in a legal newspaper; or
(2) 30 days of the creditor receiving an actual copy of the Probate Notice to Creditors in the mail.
In order for their claim to be valid, the creditor must file the claim with the Court and serve a copy of the claim on the Personal Representative.
HOW TO RESPOND TO CREDITORS' CLAIMS. Certain smaller claims are deemed accepted if the PR takes no action at all. The PR must respond to all other claims in writing. You can allow or reject the claim in whole or in part. You must file the allowance or rejection with the court and send a notice to the creditor with a copy of the allowance or rejection.
Note that if the PR does not have nonintervention powers, the court will have to approve or reject creditor claims.
Rejection of a Creditor's Claim can be contested, but the burden of proof falls to the contestant.
NEGOTIATING WITH ESTATE CREDITORS. If the estate has funds to pay the debts and creditors have filed a claim, you may wish to negotiate the debts to preserve the maximum amount for the heirs or beneficiaries. The first step to negotiating with creditors is to verify that the debt is authentic. Not all apparent debts are equally valid. Confirm that the supposed claim wasn’t previously paid by the decedent before their death. Sometimes companies don’t keep perfectly accurate records. Fraud does happen occasionally when false claims are made, so be careful to ensure that all claims are accurate.
Next, prepare a settlement offer. Contact the creditor and present the settlement offer as Personal Representative of the estate. Once you reach an agreement, get the settlement agreement in writing.
Once received, send the payment via certified mail along with a copy of the written agreement and a Receipt and Release for the creditor to sign and for you to file with the Court. Remember to request a return receipt so you have proof of delivery. Keep a copy of the payment and settlement for your records in case the creditor or a collection agency claims the debt was never paid.
INVOLVENT ESTATES. If the estate’s debts are greater than its assets, it is said to be “insolvent." If insolvent, not all debtors are going to be paid back in full. Where an estate is insolvent that court requires that all creditors who have filed a valid claim will get paid under a pro-rata division of the estate assets.
There are many factors to consider when handling creditors in a probate matter. If you’re the Personal Representative of an estate with significant debts, you may wish to consider hiring an experienced lawyer. They can help you observe all deadlines, meet the legal requirements, and negotiate with creditors. If you need help handling creditors in a probate, feel free to contact our office at 253.858.5434 to set up an appointment today.