What is an Insolvent Estate? (Part 3)

In my blog post last week, I explained that when the assets of a decedent are insufficient to cover all estate debts, the debt is classified by priorities.  Debts are entitled to be paid in a certain order of priority.  Eventually, however, in the case of an insolvent estate we will get to a category for which there are not enough assets to cover the debt.  So who gets paid and in what amount?

The creditors at that certain level won’t be paid 100% of their claims.  There may be enough to pay them a pro rata share of their overall debt.  In some cases, creditors won’t be paid at all.  Because of that, the personal representative needs some assurance that the creditors can’t sue the estate or the representative for failure to pay their claims.

That’s where an insolvency action is necessary.  The personal representative needs a court to authorize the payment of claims so as to be able to “cut off” the unpaid claims.  The personal representative lays it all out for a probate judge – all the assets and all the debts and who should be paid.  The court filing is made upon notice to all known creditors.  The judge reviews it and if in agreement signs a court order authorizing the payments.  

In this way, the personal representative can be sure that all creditors are bound by the court’s determination and can no longer seek payment from the estate.   The personal representative can be assured that his or her job managing the estate is complete and cannot be second guessed.