An Insolvent Decedent’s Estate
- What Is an Insolvent Estate?
- What Alternatives Are Available for Dealing with an Insolvent Estate?
- What Are the Disadvantages of Opening a Probate for an Insolvent Estate?
- Procedural Issues with an Insolvent Estate
- An “Underwater” Home
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?
What Alternatives Are Available for Dealing with an Insolvent Estate?
Three alternatives are available, one of which is not recommended.
- 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.
- 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:
- Are you certain that you know of all of the creditors and the validity and amount of their respective claims?
- How are you going to allocate the Decedent’s assets among them so that each is convinced that it is receiving its fair share?
- How will you deal with the situation if, after you have allocated the Decedent’s assets among the known creditors, some further creditor appears and wants to get paid, and you have already paid what assets the Decedent left?
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.
- 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.
What Are the Disadvantages of Opening a Probate for an Insolvent Estate?
- 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:
- Allow a Personal Representative to administer the estate without further “intervention of the Court” (meaning that the PR does not have to obtain prior Court approval for taking any significant action regarding the estate).
- Are usually granted to a PR at the same time that the probate is opened and the PR is appointed.
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.
- 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:
- Making the process easier and more efficient for you as the PR.
- Assuring that the process will be carried out consistently with the law.
- Shifting money in the estate that would have been paid to the creditors to be used to pay your attorney, usually at no cost to you personally.
Example: Say the estate has $50,000 of debts, $5,000 of assets, and its legal expenses are $2,000:
- Without legal assistance, the $5,000 of assets would be allocated among the creditors, so that each would receive 10 cents (ie, $5,000 / $50,000) for each $1 of debt.
- With legal assistance, the first $2,000 of the $5,000 of assets would be paid to your attorney, leaving $3,000, which would be allocated among the creditors, so that each would now receive 6 cents (ie, $3,000 / $50,000) for each $1 of debt.
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:
- If there are sufficient funds in the estate to pay an attorney, you should be able to use the probate process easily and efficiently to resolve a Decedent’s insolvency at no cost to you personally by engaging an experience probate attorney to assist you.
- If not, then engaging an attorney may require your personal payment of funds to make up the difference between the legal expenses and the value of the estate’s assets.
Procedural Issues with an Insolvent Estate
See: Procedural Issues.
An “Underwater” Home
See: Underwater Home.