What Happens When An Estate Doesn't Have Enough To Pay Its Debts?

When a person dies, the ideal outcome would be that there would be enough to pay off any debts they have left behind, cover the cost of their funeral, and maybe even leave some money behind for their family. Unfortunately, this situation doesn't always play out in this manner. Instead, sometimes, the estate does not even have enough money to pay off their debts.

Prioritizing Debts

An important factor to remember is that debts are typically prioritized whenever it is determined that the estate does not have enough money to pay all of its debts. For instance, funeral expenses and mortgage payments, if the deceased left behind a family, are often given a higher rank of importance than a small credit card balance. 

Each state has its standards by which debts are prioritized, and it's critical you follow these standards. It's a good idea to partner with an attorney in your state to ensure you go about the process correctly before you attempt to pay any of these expenses. 

Liquidating Property

While debts are prioritized, it does not mean that the state can't come back and make you pay additional expenses by liquidating property. Typically, when the attorney representing the family notifies the court that the estate does not have enough money to cover all of its expenses, the court can force the estate to liquidate some of its assets. 

This step is more common when the estate has several high-value assets that would cover their debts, such as real estate property. In this instance, the court could require that the assets be evaluated to confirm their value and sold to pay off the outstanding debts. 

Insolvency Declaration

If you are the executor of an estate in this scenario, there is no need to stress. The court can also rule that an estate is insolvent, which is a legal declaration that the estate does not have enough to pay off all their debts and is not required to.

However, gaining this status is not automatic. The executor must file a petition to request this declaration and must outline all the assets that were left in the estate, including life insurance policies. Filing this petition correctly is critical to preserve those assets that the deceased left to their beneficiaries. It's suggested that you partner with a probate attorney to go about this step. 

If you have concerns about the value of an estate you are the executor for and the ability to pay its debts, it's essential to speak with an attorney to ensure the process is handled correctly. Look for someone who practices probate law for more information.