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WA-Probate > Probate Instructions > An Insolvent Decedent's Estate

 

Washington Probate Instructions

 

An Insolvent Decedent's Estate

  1. What Is an Insolvent Estate?

  2. What Alternatives Are Available for Dealing with an Insolvent Estate?

  3. What Are the Disadvantages of Opening a Probate for an Insolvent Estate?

  4. Procedural Issues with an Insolvent Estate

  5. An "Underwater" Home

 

A.  What Is an Insolvent Estate?    

 

An insolvent estate is one whose assets are insufficient to pay its debts, taxes, and administrative expenses.  As a consequence of its insolvency, its heirs or beneficiaries will receive nothing (exception: unless Decedent's surviving spouse or children are awarded a family allowance, which takes priority over creditors).

 

Probably over 90% of probate estates are solvent.  It's just a matter of collecting the assets, paying the debts, taxes, and administrative expenses, and distributing what remains to the heirs or beneficiaries.  Some 5 to 10%, however, are insolvent, having more debts that assets.  What to do?

 

 

B.  What Alternatives Are Available for Dealing with an Insolvent Estate?    

 

Three alternatives are available, one of which is not recommended.

 

1.  Do nothing.  In general, relatives and friends have no legal obligation to do anything under the circumstances --- to pay the debts, to communicate with the creditors, to open a probate, whatever (some exceptions: a surviving spouse or if someone has contractually agreed to do it).  So, by far the simplest solution is to walk away from the problem --- don't get involved.  And if you choose this alternative, you should not begin taking any action at all, for example, by communicating with the creditors, and then change your mind and decide not to get involved any further.  If you decide not to be involved, don't get involved --- from the start.  Let the creditors do what they think is best to protect their own interests.

 

The "problem" with this alternative is that even if you have no legal obligation to pick up the pieces of the Decedent's death, the creditors and their collection agencies will do everything they can to get you to assume and pay the Decedent's obligations --- a true guilt trip.  And they likely won't take "No" for an answer and will continue to hound you.  After all, all they want is to get paid, and they don't care where the money comes from.

 

Consequently, while you may have no legal obligation to pay a Decedent's obligations, if you tough it out and don't pay the creditors, you may not be out any money --- but ... this alternative will likely cost you emotionally, with your getting repeatedly badgered by the creditors and their collection agencies, who will likely make threats to affect your credit ratings etc.

 

2.  Deal with the Creditors Personally.  This is the compromise solution.  For example, you could notify the creditors of the Decedent's death and use what assets he/she left to pay them, possibly paying them with some of your own funds.  Here, the "problems" are:

For a variety of reason, this alternative is not recommended.  Despite all your good intentions and efforts, you could find yourself in a worse situation than when you began.

3.  Use the Probate Process Like a Bankruptcy Proceeding.  Fortunately, the WA Legislature has provided a remarkably efficient solution to the problem of an insolvent Decedent, through the WA Creditor's Claims procedure --- in some sense like beginning a bankruptcy proceeding for a Decedent, to discharge his or her debts.  [A formal bankruptcy proceeding is not allowed for a deceased person or his/her estate --- this alternative, however, mimics what would happen if it were.]  You open a probate for the Decedent, probably asking the Court to appoint you as his/her Personal Representative, and then, as his/her Personal Representative, you use the Creditor's Claims procedure in the probate estate to resolve and discharge all of the Decedent's debts, with each creditor having a stated time in which to make its claim and receiving a ratable share of any assets that remain after payment of administrative expenses, funeral & burial bills, and taxes.  Furthermore, it is all handled under Court supervision, so if any conflict or dispute arises, it's not directed against you, and you have the Court available to serve as a referee and resolve it.

 

 

C.  What Are the Disadvantages of Opening a Probate for an Insolvent Estate?    

 

1.  Need for an Attorney.

 

One of the "problems" in opening a probate for an insolvent estate is that, due to its insolvency, it is not eligible to be granted Nonintervention Powers by the Court; an estate must be solvent to receive Nonintervention Powers, which:

Practically speaking, Nonintervention Powers are what allows a PR to probate an estate without legal assistance.  Without Nonintervention Powers, however, about anything a PR wants to do on behalf of the estate will take going back to Court and obtaining a Court Order authorizing the proposed action, which will likely require legal assistance.

 

2.  If Insufficient Assets to Pay Legal Expenses.

 

Not having Nonintervention Powers results in more legal work and more legal fees and expenses to probate an insolvent estate than one that is solvent, typically at least $1,000 more.

 

If the estate has more assets than legal expenses, then practically speaking, it should not cost you anything personally to engage legal assistance.  What you would pay for legal assistance will simply reduce the amount left over to pay creditors.  In other words, if the estate is insolvent, so the heirs or beneficiaries are not going to receive anything from the estate anyway and all of the estate is going to be used to pay debts, taxes, and administrative expenses, obtaining legal assistance results in:

Example:  Say the estate has $50,000 of debts, $5,000 of assets, and its legal expenses are $2,000:

If, however, there are insufficient assets in the estate to pay the estate's legal expenses, then not only will the creditors get nothing, but either your attorney will need to accept less than he or she would otherwise charge, or you (and possibly the heirs or beneficiaries) will have to make up the difference personally.

 

Bottom line:

 

D.  Procedural Issues with an Insolvent Estate    

 

See:  Procedural Issues.

 

 

E.  An "Underwater" Home    

 

See:  Underwater Home.

 

 

 

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