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For Estate Planning, Estate Administration And Disputes

What happens if the estate is not enough to pay creditors?

On Behalf of | May 30, 2023 | Estate Administration & Probate |

Even after an estate owner dies, their debts and liabilities continue to exist. This is where probate and estate administration comes in. The state executor will pay the decedent’s liabilities before distributing the remaining assets to the heirs and beneficiaries. But what happens if the estate runs out before everyone gets their share?

Declaring insolvency

The court can declare an estate insolvent if its assets are no longer enough to cover and pay for the decedent’s debts and liabilities.

How does this happen? When handling the distribution of an estate, the executor follows a hierarchy of recipients under the New York Surrogate’s Court Procedure Act. This means there is an order in which the executor must pay the decedent’s expenses, debts and other claims. The payment order should be as follows:

  • Funeral and burial expenses
  • Preferred debts under the federal and state laws
  • Property taxes assessed before the estate owner’s death
  • Court judgment fines and claims
  • All other debts, including contractual claims

If the estate goes insolvent before paying every debt on the list, the latter claimants are more likely to end up not receiving anything.

Can creditors go after beneficiaries and heirs?

Under New York estate laws, if the executor distributes the estate assets to the heirs and beneficiaries before paying the debts, the distributees can be liable for paying those liabilities.  However, creditors cannot hold them personally liable and can only receive payments from the estate assets that the heirs and beneficiaries received. This means that if the estate becomes insolvent before the creditors, heirs and beneficiaries receive anything, the creditors cannot go after the latter.

Probate and estate administration can be challenging, especially if the decedent has left numerous debts. A good understanding of the process and proper guidance from an experienced attorney can help you go through the process smoothly.