Perhaps one of the most common questions asked after a person has passed away is, do their debts survive death?
This is of particular importance to both the creditors who find themselves wondering if they can still collect, and the heirs of the deceased who may also be wondering if they are supposed to pay their loved ones’ remaining debts.
For the personal representative, the more crucial question is: which debts should be paid from the estate? If the assets are not enough to cover all the liabilities, which ones should be paid first?
California law provides guidelines for notifying creditors, assessing which claims are valid, and determining the order in which claims against the estate are to be paid.
Identifying and Notifying Creditors
One of the duties of the personal representative is to identify and notify all possible interested persons to whom the deceased might have owed money. Under California Probate Code §9050, the personal representative is expected to give notice to all known or reasonably ascertainable creditors of the decedent.
When we break this down, this means that a certain objectivity and impartiality is expected of the personal representative. He shouldn’t favor those personally known to him so that they could get paid more quickly than other creditors.
The task that falls on the shoulders of the personal representative is to first identify all creditors that he either knows or can reasonably ascertain. This could simply mean going through all the documents, papers, emails, and other records of the deceased to ascertain persons or entities to whom the deceased may have owed something.
For instance:
- Reviewing the decedent’s mail and other files for bills or past due notices
- Examining at least three years of their state and federal tax returns
- Reviewing bank statements and credit card profiles to identify any recurring payments
- Checking for outstanding medical bills
- Reviewing loan documents and mortgage records
Once this list of creditors has been compiled, the personal representative should notify all the possible creditors of the death and the time limits within which claims can be brought against the estate.
Time Limits for Filing a Claim
A time limit on when claims can be brought against the estate then shifts the burden to the creditor once the personal representative has accomplished his duty of notification.
Typically, once the letters of authority are issued and notice is given, creditors only have four months within which they can file a formal creditor’s claim with the court.
This four-month time limit is a general rule, however, and allows for certain exceptions. For instance, the law also allows for a six-months period for a creditor to file a claim, reckoned from the time when the personal representative gives the creditor notice.
In any case, there is a one-year absolute limit from the time of death, after which all claims are barred. This one-year limit is controlling, regardless when the letters of authority were issued, or when written notice was given to the creditor.
The 90-Day Notice to Medi-Cal
If the deceased received Medi-Cal benefits, the personal representative also has the duty to notify the Director of Health Care Services within 90 days from the date of death.
This is one of the most common pitfalls for personal representatives who may be unaware of their obligation to notify Medi-Cal. If the personal representative fails to notify Medi-Cal, the one-year time limit barring claims may not even apply. This is because Medi-Cal is entitled to a mandatory notice, and if they never received it, courts may allow the Department of Health Care Services (DHCS) to assert its claim later.
Practically, this can open up the estate to late claims, and the personal representative, to personal liability.
To prevent this from happening, some consider it best practice to notify DHCS of a death regardless of whether or not they have confirmed with certainty that the deceased received Medi-Cal benefits.
On the Priority of Debts
So you have made the list of creditors, and given them due notice. You have also consolidated and preserved all the estate assets. What’s next?
One of the responsibilities of the personal representative is to pay out from the estate on the valid and approved claims. Under California Probate Code §11420, there is a priority of debts. This means that claims need to be paid out in a descending order of priority:
- Administration expenses, including legal fees and executor fees
- Secured obligations
- Funeral expenses
- Costs of the last illness
- Family allowance
- Wage claims
- General unsecured debts
The authority of the personal representative to pay out on these claims, either with or without prior court-approval, depends on whether the personal representative has authority under the Independent Administration of Estates Act (IAEA).
If they have IAEA authority, they can generally allow for the payment of claims even without prior court approval.
Regardless, the final accounting will be subject to review by the court, and any unauthorized acts or conduct falling short of the required duty of care will be scrutinized closely. If the estate suffers any losses as a result, the personal representative may be considered personally liable and required to reimburse the estate for those losses.