What if You’re an Heir, and Your Decedent Owed Someone Money?

The personal representative must send notice to all creditors of the estate, and each creditor must respond before a date certain. If a creditor responds and you dispute his claim, the creditor must file suit and the judge must decide whether to pay the claim. There is a certain order of precedence as to when debts are to be paid.

Many people die while they are in debt. When the heirs come to me and ask me to help them settle the estate, the questions often arises: how should they pay the debt?

You must notify all creditors

When a probate case is filed in court, someone will ask the judge to appoint them personal representative. When a judge appoints a personal representative, the personal representative must notify all creditors within two months after the judge appoints him. Here’s the legal procedure for notifying a creditor:

1.    File a “notice to creditors” in court. The notice must give a date by which creditors must respond. The response deadline date must be at least two months after the date you file the notice. (If the decedent has been dead for over five years before you the probate was filed, the response deadline date need only be one month after the date you file the probate. Also, if you file a summary probate, the deadline date need only be thirty days after you file the notice. To read about summary probate, click here.)

2.    If you know the name and address of a creditor, you must send the creditor notice by mail. You must mail this notice less than ten days after you file the notice in court.

3.    You must also publish the notice in a newspaper in the county where the probate was filed. You must publish this notice once a week for two consecutive weeks. You must publish this notice even if you are not aware of any creditors.

4.    You must file an affidavit, listing the names of all creditors to whom you mailed notice. If you don’t know of any creditors, you must file an affidavit saying you don’t know of any creditors.

What the creditors must do

Every creditor must send you a claim before the date you specify in the deadline. If a creditor does not send you a claim within that time period, that creditor’s rights are forever barred, and the creditor may not continue to proceed with the claim. Some of my clients have had creditors submit claims years after the deadline. I tell these clients they may happily ignore these claims.

There are two exceptions to the rule that creditors must present claims within the deadline:

1)    If the creditor was out of state, and you didn’t mail notice to the creditor, then the creditor may present the claim any time before the judge signs the final probate decree.

2)    If the decedent owned real property, and the property had a mortgage, the holder of the mortgage may still foreclose on the mortgage at any time the mortgage foreclosure laws allow. However, in some mortgages, the creditor does not recover all of the money it was owed. In this case, the mortgage creditor often files a suit to seek a “deficiency judgment” against the debtor (See this post to read about deficiency judgments.) If the mortgage creditor seeks a deficiency judgment against the estate of a deceased person, then the mortgage creditor may not recover any amount, if the mortgage creditor did not present a claim for that amount within the deadline required in probate cases.

What you must do after you get a claim

After you receive a claim, you may either approve the claim or reject the claim. If you approve the claim, you must then submit the claim to the judge, and the judge may approve or reject the claim. If you reject the claim, you must send a rejection back to the creditor. If you don’t do anything within thirty days after you receive the claim, the claim is deemed rejected on the thirtieth day after the creditor presented the claim to you. If you approve the claim, and submit the claim to the judge, and the judge doesn’t do anything within thirty days after he received the claim, the claim is deemed rejected on the thirtieth day after the judge received the claim.

If you reject the claim

If you reject the claim, then the creditor must file suit within forty-five days after the date of rejection. If the claim was not yet due on the forty-fifth day, then the creditor must file suit within two months after date the claim becomes due. If the creditor does not file suit within the prescribed time period, the creditor is forever barred from pursuing its claim.

If the creditor files suit, the lawsuit will function just as any normal civil suit. The judge will then decide if the decedent really owed the money that the creditor is claiming. There’s also a procedure in the probate case where you and the creditors can agree to have a referee, rather than the judge, decide whether the debt is to be paid.

If the claim is approved, how do you pay it?

If you approve the claim (or if you reject the claim and the creditor files suit and the judge rules in the creditor’s favor) then you will have to pay the claim. However, the claim must be paid from the decedent’s estate; you will not need to pay anything out of your own pocket. You must pay debts in the following order:

1. Costs of the funeral.

2. The expenses of the deceased person’s last illness.

3. Money that the decedent’s family needs for their support, and that the court allows.

4. Taxes.

5. Debts having preference under federal law or Oklahoma state law.

6. Judgments that a court granted against the decedent while he was alive. You must pay these judgments if they are liens against the estate. You must also pay mortgages of the estate. You must pay these judgment liens and mortgages in the order of the date they became operative.

7. Any other demands that a creditor presented before the deadline.

8. All other demands against the estate except interest on federal estate and transfer taxes.

9. Interest on federal estate and transfer taxes.  

Another state law says that as soon as the funds are available, the personal representative must pay funeral expenses, expenses of the decedent’s last illness, and any allowance to the decedent’s family.

Even though the above laws specify a priority of payment, the law on presenting claims within the deadline still applies to creditors on the above mentioned types of claims. The Oklahoma Supreme Court has held that if a creditor on one of the above listed claims doesn’t present a claim in time, that creditor’s claims are barred.

What if the estate doesn’t have enough money to pay the claim?

If the estate does not have the money to pay the claim, then contact the creditor and see if they will accept a payment less than what is owed. If you can work out an agreement, you won’t have to pay the claim. If you can’t work out an agreement, you will have to go to court and get an order from the judge as to how much you’re to pay.

You may also pay a claim even if a creditor doesn’t present the claim

If you’re aware of a debt that the decedent owed, then you may pay the debt out of estate funds even if a creditor did not present the claim. As long as you can prove to the court that you paid the claim “in good faith” you may pay the claim.

Have questions about a debt that an estate owes? Contact the Persaud Law Office.

At the Persaud Law Office, we’ve helped many people pay off debts of deceased loved ones. If you’re faced with an issue of claims against an estate, we’re happy to help. Give us a call today.

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