Insolvency: What an executor can do when the estate can’t pay all the bills.
Estate insolvency occurs when a person dies leaving behind more debt than there are funds to pay off the debts. Any assets in the estate including real estate may be sold off to repay debts. The estate’s executor, beneficiaries or heirs generally will not be responsible for debts that cannot be paid due to insolvency. However, the executor must take at least some additional step as part of the probate process.
How to claim Insolvency for an Estate.
When an executor ascertains that there’s not enough money to pay all bills, typically a petition is filed with the court, alerting the court and creditors of the shortfall in funds. The judge then issues an order, detailing which debts can be paid from your available money and from liquidation of the estate’s property.
Under the law, insolvency has a specific priority of payments. Under N.J.S.A. 3B:22-2 if the applicable assets of the estate are insufficient to pay all claims in full, payments are made in the following order:
- Reasonable funeral expenses; whomever paid for the funeral (if not the estate) can be reimbursed including funeral, headstone and repast;
- Costs and expenses of administration; administration expenses include surrogate fees, estate business related travel costs, postage, rental cars, tolls, attorney fee, accountant’s fee, bond fee, commission etc;
- Debts for the reasonable value of services rendered to the decedent by the Office of the Public Guardian for Elderly Adults;
- Debts and taxes with preference under federal law or the laws of this State;
- Reasonable medical and hospital expenses of the last illness of the decedent, including compensation of persons attending him; Medical providers;
- Judgments entered against the decedent according to the priorities of their entries respectively;
- All other claims. All other debts in a pro rata share.
An Attorney can be hired with estate funds to file the Insolvency.
If there are enough funds in the estate to pay an attorney, hiring an attorney is an allowable administration cost for insolvent estates. While the heirs may be disappointed not to be receiving an inheritance, the executor is entitled to legal assistance claiming insolvency.
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