7 minute read

What is a Creditor’s Claim?

Creditor’s claims can be filed against an estate to collect unpaid debts and liabilities. Find out who can file a claim, how, and when.

Mitch Mitchell

Mitch Mitchell, @MitchMitchell

Product Counsel, Legal, Trust & Will

Just like there are state and federal laws that protect consumers, there are also laws that protect the right of creditors. In most cases, creditors can legally enforce their rights against debtors through foreclosures, garnishments, collection suits, and other avenues. 

However, what if the debtor is deceased? 

When this is the case, the process of collecting on debt looks quite different. This guide will explain how a creditor’s claim works in probate, including what it is, how it’s filed, and how long creditors have to file it. 

Creditor’s claim: definition

A creditor’s claim is a demand for payment of outstanding debts and liabilities. In the context of the probate process, the creditor’s claims are filed against the unpaid debts and liabilities of a decedent. 

There are two common instances of creditor’s claims against a decedent and their estate:

  1. An attempt to collect on debts for which the decedent incurred while they were alive, and for which they were legally liable.

  2. A payment or distribution amount out of the decedent’s estate is promised, but the distribution or payment doesn’t take place.  

In the first scenario, creditors are attempting to collect on debts incurred by the decedent. After the individual has passed away, the debts are collected from the assets and property comprising their estate. By filing the creditor claim, they are making a demand to have these debts repaid. 

Here are some common examples: 

  • Creditor - Bank

  • Claim - Outstanding mortgage payments

  • Creditor - Internal Revenue Service (IRS)

  • Claim - Unpaid income taxes

  • Creditor - Credit Card Company

  • Claim - Credit card balance and late fees

  • Creditor - Tort

  • Claim - Property damage claim

  • Creditor - Funeral Home

  • Claim - Funeral expenses

In the second scenario, a creditor’s claim may arise when the decedent made promises regarding their estate, but those promises don’t pan out. For instance, maybe they promised to a loved one that they would receive a certain dollar amount when they were to eventually pass away. This individual may attempt to file a claim when estate distributions are made and they don’t receive the amount they were promised. 

The probate court will hear these claims and ultimately decide whether or not these claims should be paid, and how much. Regardless of the outcome, the key takeaway here is that individuals and entities have the legal right to file claims against an individual even after they have passed away. While they may not be able to pursue traditional means of repayment, they can file a claim against the decedent’s estate. 

However, this also means that these creditors must be aware of the individual’s death so that they know to come forward with a claim. This is where a notice to creditors comes into play.

What is a notice to creditors?

When an individual passes away, a personal representative must file to open probate for their estate (with certain exceptions.) The personal representative must also fulfill a number of administrative duties regarding the settlement of the estate, under the supervision of the probate court. 

While probate rules from state to state, generally, a personal representative must post a notice to creditors to notify them of the decedent’s death.

In California, for example, this is called a Notice of Administration to Creditors (Form DE-157.) This is a form that is filled out by a personal representative of the estate. It informs the decedent’s creditors who the personal representative is (the person managing the decedent’s estate), their contact information, and instructions regarding how and when to file a claim against the estate. 

The process of posting a notice to creditors will vary from state to state, but this provides a general idea of the purpose of the notice. 

Creditor’s claim: who, how, when & why?

The following includes important details regarding creditor’s claims, such as who is responsible for paying them and how they are filed.

1. Who is responsible for managing creditor’s claims?

Each state has its own set of probate laws, outlining the procedures for handling creditors in the probate estate. The individual responsible for administering the estate, commonly referred to as the personal representative, has the duty to inform creditors about the deceased person's passing. This is the Notice to Creditors that was explained in detail earlier. This notification allows creditors to come forward and make claims against the assets in the probate estate.

If the deceased person left behind documentation detailing their debts, it's relatively straightforward for the personal representative to identify the creditors. However, complications can arise when creditors assert claims that are not reflected in the deceased person's records. 

In these cases, the personal representative should exercise caution, as they could potentially be held personally accountable if creditors are not paid appropriately or if the probate estate assets are distributed based on invalid claims. When the personal representative approves a creditor's claim, the amount owed is paid using the assets from the probate estate. They may even have to liquidate property to raise cash to pay creditor claims. Conversely, if a claim is rejected, creditors may resort to legal action against the probate estate in order to secure payment. This legal process can lead to significant delays and expenses.

2. How are creditor’s claims filed? Generally, claims falling under the first category (claims arising out of contract, tort, taxes or funeral expenses) must be filed with the court after the estate enters probate. Filing a claim requires the use of a Judicial Council creditor’s claim form, which is available at the courthouse or on the Judicial Council website.

A creditor must then serve a copy of the claim upon the person appointed as the personal representative of the decedent’s estate. Service must be made within 30 days after the claim is filed or 4 months from the date the Letters Testamentary or Letters of Administration are issued, whichever date is later. Failure to serve the personal representative invalidates the claim.

3. When is the creditor claim period?

Once probate for the decedent’s estate has begun, creditors are granted a specific timeframe within which they can file claims with the court. For example, in California the deadline extends from either four months after the issuance of the Letters Testamentary or 60 days from the date the personal representative sends the Notice of Administration to the creditor, whichever date occurs later. One year after the decedent’s death, creditors can no longer file claims or recover unpaid debts. 

4. Why is the creditor claim period necessary? The creditor’s claim period serves as a statute of limitations of sorts. After the creditor claim period concludes and the probate court verifies that all debts have been repaid, the judge will allow the personal representative to pay out distributions to the beneficiaries of the estate. Once the period concludes, new claims cannot be filed. This essentially protects the beneficiaries from having to worry about any new creditors coming forward once they have received their inheritances. 

How to respond to creditor’s claims

As a personal representative of an estate, when you receive a creditor's claim, it is important to respond in a timely and appropriate manner. Here are the general steps you can follow to respond to a creditor's claim:

1. Review the claim: Carefully examine the creditor's claim and ensure that it includes all the necessary information, such as the name of the creditor, the amount owed, the basis for the claim, and any supporting documentation. Verify that the claim is valid and related to the deceased person's estate.

2. Verify the statute of limitations: Determine if the creditor's claim is within the statute of limitations period. The statute of limitations sets a time limit within which a creditor must file a claim against an estate. If the claim is time-barred, you may not be legally obligated to pay it. Consult with an attorney to understand the applicable statute of limitations in your jurisdiction.

3. Evaluate the validity of the claim: Assess the validity of the claim by reviewing supporting documentation and investigating its legitimacy. If you have any doubts or require additional information, you can request more details from the creditor.

4. Accept or reject the claim: Once you have reviewed the claim and assessed its validity, you can accept or reject it. If the claim is valid and the estate has sufficient funds, you can accept it and proceed with the payment. If the claim is invalid or lacks sufficient evidence, you can reject it, but you should provide a written explanation for the rejection.

5. Inform the creditor: Notify the creditor in writing about your decision to accept or reject the claim. Include a clear explanation of your decision and any supporting documentation or evidence. Ensure that you send the notification within the required time frame specified by local laws.

6. Resolve disputes: If the creditor disputes your decision or disagrees with the handling of their claim, you may need to engage in further negotiations or legal proceedings to resolve the dispute. Consulting a legal professional or service to determine the best course of action may become necessary in this case.

7. Maintain accurate records: Throughout the process, keep detailed records of all communications, decisions, and supporting documents related to the creditor's claim. This documentation will be crucial for transparency, accountability, and potential legal proceedings.

Please note that the specific procedures and requirements for responding to a creditor's claim may vary depending on your jurisdiction. 

When should I pay creditors and in what order?

The exact time frame for paying back creditors depends on a number of factors, such as the size and complexity of the estate, the types of assets the estate owns, and any disputes or challenges to the claims. 

As the personal representative of the estate, your job is to settle these debts as quickly but as diligently as possible. For instance, you don’t want to be so swift that you accidentally pay an invalid claim. 

Overall, debts should be paid before you begin to make any distributions to beneficiaries of the estate. The probate judge should advise when you can move on to this step. 

In terms of the order in which to pay debts, the probate court will also typically advise you on how to prioritize debts. This is discussed in detail in our Debts and Probate guide. Paying estate debts in order of importance is important because there are cases in which the estate may become insolvent, meaning that there aren’t enough assets to pay back debts, even after property has been liquidated to raise cash. If this happens, then any remaining unpaid debts will not be paid. This is legally advisable by the probate court. Luckily, any remaining debt will not be inherited by the beneficiaries of the estate. 

If you’re worried about the liquidation of property, know that each state provides lists of exempt property. For instance, most states won’t force you to liquidate real estate or other valuable items such as family heirlooms or jewelry. In most cases, items such as these are protected from creditors. These protections are in place such that a legacy won’t be completely lost to creditors. 

Navigate probate with more ease with Trust & Will

As the personal representative of an estate, it is part of your (many) responsibilities to understand how creditor’s claims work. You will be tasked with the process of notifying creditors, managing claims that come through, understanding the timeline, and keeping your eye out for invalid claims. Further, you are also responsible for the repayment of unpaid decedent debts using estate assets. 

Navigating the probate process is, without a doubt, intricate and at times confusing and challenging. If you are scratching your head and silently wishing you had someone to help you out with this, look no further! At Trust & Will, we understand that navigating the probate process can be overwhelming– but we're here to help.  Our plans provide clear, county-specific guidance and support from probate experts so you can stay on top of the process. Learn more about our probate offerings.

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