What Does an Insolvent Estate Mean?

If you’re responsible for an estate where the deceased passed away with fewer assets than financial liabilities, you’ll want to know, what does an insolvent estate mean? When you think of administering an estate after someone dies, you likely think of handing out their money and property to family members according to their Last Will and Testament. However, many people have financial issues and may pass away with serious debts and few assets.

What Does It Mean When an Estate Is Insolvent?

When you have more debts than you do assets and property, you are legally called “insolvent.” So, what happens when you leave behind an insolvent estate?

A big part of administering an estate is settling all debts and paying necessary taxes. In some cases, however, there is not enough money to cover all of the debts and taxes. There are different options for handling this situation. First, any joint debts will still be the responsibility of the joint account-holder. Debts that are in the deceased’s name only can be handled in different ways.

Do Heirs Have to Pay Debts of an Insolvent Estate?

Those who were named to inherit from an estate will not have to pay the insolvent estate’s debts. Creditors do not have the right to come after you for someone else’s debts. Heirs aren’t responsible for their relative’s debts. Even if a family member left large credit card bills, you have no personal, legal responsibility to pay them. Family members of the deceased do not have to worry about credit scores, so if the accounts go into collection, there is no effect on you or your family.

How to Handle Creditors When an Estate is Insolvent

Creditors will likely try to collect the debt for some time, which can be a constant reminder of your loss and can be inconvenient and annoying. Some family members think they are doing the right thing by trying to allocate whatever assets exist among creditors to pay partial debts. However, once you do so, you can bet creditors will continue trying to collect the remaining balances.

If an estate is insolvent, you also shouldn’t try to distribute the deceased’s assets to heirs. Those assets belong to rightful creditors. An exception is family heirlooms, photos, or other small assets with emotional, but not financial, value.

Trying to negotiate with the creditors may be worthwhile. If you’re honest with them about the estate’s assets and liabilities, they may be willing to discuss a faster payment at a discount. If you can do this, you must get a proper release from the creditor. Without it, the creditor could claim it’s just a partial payment and seek the rest of what’s owed. If you’re successful with enough creditors, the estate may be solvent.

How to Administer an Insolvent Estate

Insolvency means that there aren’t enough assets to pay the estate’s bills and taxes. It doesn’t concern the allowance, or validity, of creditors’ claims. After claims are deemed legitimate, they’re ranked in order of priority based on state law. Payment of claims, taxes, and expenses of an insolvent estate is handled according to the following:

  • Costs of estate administration (filing fees, your commissions, and fees of attorneys, accountants, and appraisers)
  • Funeral expenses
  • Expenses of the deceased’s last illness
  • Wages for work done within 60 days before the decedent’s death (servants’ wages)
  • Debts with preference under federal law (such as federal income, gift, and estate taxes)
  • Taxes and other debts owed to the state (property and business taxes)
  • Judgments against the decedent which are liens on real estate on which an execution might have issued at the date of death, and debts secured by mortgages in order of their priority
  • All other demands against the estate.

Payment would start with the top class, according to state statute. The liabilities would be paid in full if there’s enough money. If there is not enough money to pay all of the debt in full, then the creditor is paid their share of the total owed. If there’s money left over, it moves to the next class, paid in the same way until there are no assets left.

Get Help with an Insolvent Estate Instead of Getting Yourself in Trouble in Probate Court

While submitting the estate to probate under Washington State law may seem like the most complicated option, probate courts can deal with an insolvent estate just like a bankruptcy court can deal with overwhelming debts for living individuals. However, insolvent estates will not be granted Nonintervention Powers, which allows an estate representative to handle the affairs without court involvement. Instead, the court must approve all actions taken, which can be complex.

If you want to submit an insolvent estate to probate to resolve the debts, it is a wise idea to have legal representation throughout the process. Dickson Frohlich knows how to administer an insolvent estate.

An attorney who fully understands the probate laws and procedures can ensure that the process goes as efficiently as possible and that an estate’s administration is in full compliance with the law. If you are concerned about paying for legal expenses, the court will likely allow you to pay a lawyer out of whatever estate assets exist before the rest goes to creditors. Rather than face handling an insolvent estate alone, call our attorneys at Dickson Frohlich at 206-429-6931. We’ll guide you through each step in the complicated process.