What is an Insolvent Estate? Part 1

As I have written about previously in this blog, estate administration involves gathering the assets of the person who died, paying all debts and taxes owing, and distributing the remaining assets to the rightful heirs – determined either by a will if there is one or by state intestacy laws if there is not.  But what happens if there are not sufficient assets to pay all the debts?  What happens then?

When there are not enough assets to pay all the creditors, this is known as an insolvent estate.  So who determines which creditors are entitled to be paid first and in what amounts?  There is a law that answers that question and is the reason why I tell executors and administrators that where it is not clear that there are sufficient assets to cover all debts they should not pay bills as they come in.  They must wait until all creditors present their claims.

When I explain this, the next reasonable question is, “how long must we wait?”.  The New Jersey statute requires that all creditors present their claims to the personal representative (ie. executor or administrator) within 9 months from the date of death.  If a claim is not presented within that time frame, the personal representative cannot be liable to pay the claim if the assets have already been distributed.

I should also point out that the personal representative is not obligated to pay a claim presented if it is disputed.  The representative  has 3 months to provide notice in writing to creditors or their attorneys as to whether they intend to allow or dispute the claim.  Creditors then have 3 months to bring an action to recover on the claim or the part of the claim that is disputed. 

Let’s now go back to the scenario of an insolvent estate where there are not enough assets to cover all the creditor claims presented.  Who gets paid, in what amounts and in what order?   I’ll cover that next week.