The Executor’s Guide to Paying Creditors

There is so much focus on assets and distribution in the estate administration discussion that the issue of debt and creditors often falls by the wayside. However, creditors play a huge role in the probate process and debt is often a major complicating factor. In fact, insolvent estates are often among the most challenging to administer. An unwary executor can create a whole host of problems for the estate—as well as for him or herself personally—by not being adequately prepared to respond when the creditors of your deceased loved one’s estate soon come calling.

Under normal circumstances, the executor and the surviving family members of a deceased person are not responsible for his or her debts. However, many creditors will go to great lengths to insinuate otherwise without actually stating it. As a result, it is common for family members to panic and begin writing checks to pay off debts for which they have no legal responsibility.

Executors as well can get themselves into trouble by being too quick to pay claims they receive from creditors. Beyond the fact that not all claims presented to the executor may be valid, executors can also put themselves at risk by paying valid claims too soon if the estate turns out to be insolvent. When this is the case, the New Jersey Statutes dictate that Executors must pay valid claims in a particular order:

• Reasonable funeral expenses
• Costs of administration
• Debt for services rendered by the Office of Public Guardian for Elderly Adults
• Debts and taxes preferred under state or federal law
• The costs of the final illness of the deceased
• Judgments against the deceased prior to death
• All other claims

When the assets of the estate are sufficient to pay all creditors, this priority scheme is typically not an issue and creditors can be paid in any order. However, executors should be wary of paying lower priority creditors while leaving insufficient assets to pay those with a higher priority under the law. Furthermore, secured creditors still have the right to repossess or foreclose upon estate property against which they hold a lien. Executors must be aware of these liens and prepared to make decisions about how they should be handled. Creditors who hold large claims may take a very active interest in the estate’s administration, making it incumbent upon the executor to ensure every action he or she takes is reasonable and well documented.

The presence of creditors makes the administration of even fairly small estates much more complicated than simply handing property out to the heirs. The best way to avoid making a costly mistake is to have the assistance of an experienced New Jersey probate attorney. Contact Alec Borenstein today by phone at 908-236-6457 or by email at alec@bmcestateplanning.com.