Proper Payment of Creditor Claims Against an Estate

During an estate administration, people are tempted to pay bills in full as they come in. However, that is a dangerous strategy. In fact, doing so may cause you many more problems that it solves.

All bills are not created equally, and there are requirements that must be met in order for a bill against an estate to be valid. Messing up either point can be costly for a personal representative because it may lead to personal liability for the debt.

Let’s start with a basic point. In North Carolina, like most other states, there is a priority list for how to pay creditors. Secured creditors are first in line. Those are things like mortgages, deeds of trust, and anything secured by a lien on certain property. Up next is the costs for funeral expenses and a suitable grave marker. Each of those has a dollar limit on the claim though, so often times the funeral home moves up the line for only part of what they are owed.

Next comes Federal claims, usually taxes owed at the time of death. After federal claims, comes state claims. Again, usually taxes. Next comes valid Judgements against the Decedent. Also included in that class is any Medicaid claim against the Decedent. Next we have wages owed to anybody employed by the Decedent for the 12 months prior to death. Also what is called last illness care, meaning medical expenses related to the cause of death incurred in the 12 months prior to death. Next comes equitable distribution, in cases where a Decedent was involved in an equitiable distribution as part of a divorce or separataion.

Finally, we get to unsecured creditors. That’s where the majority of debts of a Decedent will fall. Things like credit cards, personal loans, etc., all come under this category. This is the category where people will get into trouble. Often times, these debts will seem to come from professional debt collection agencies. Those are intimidating to most people, so they immediately pay them off. However, that is dangerous.

One of the reasons that it is dangerous is because if there is not enough money to pay all of a Decedent’s debts in full, there is a formula that you use to figure out who and how much to pay. It is definitely not on a first come, first served basis, so paying debts that way is incorrect. If you pay an unsecured creditor in full without first making sure that all other debts are also paid, you’ve breached your fiduciary duty and can both be removed as personal representative and face personal liability for the unpaid debts.

Even if the Decedent owed someone money at the time of their death, every creditor of a Decedent must properly filed a creditor claim against the estate to have a valid claim. That requires the creditor to take several steps to perfect their claim. If they fail to do so, the claim is invalid and should not be paid at all. There are both time limits and informational requirements that the creditor must meet. Paying someone who failed to meet those requirements is a breach of your fiduciary duty as well.

So what should you do? If you are a personal representative, you should familiarize yourself with your state’s rules for paying creditors. Each state will be different. In North Carolina those priorities can be found in our general statutes. Review them. If you have any doubts or questions, give us a call. We’ll review your situation and help you settle the estate the right way.