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What Happens if My Estate is Insolvent?

Normally when we talk about estate planning, we assume there will be an estate with sufficient assets to provide for a person’s heirs. What happens if you die with more debts than assets? In legal terms, this is known as an “insolvent estate,” and California law establishes certain rules to deal with such a situation.

California’s Order of Priority for Estate Creditors

First of all, even if you have a will, you cannot use it to avoid paying certain obligations. For example, you cannot direct the executor of your estate to give all of your money to your children and not pay your creditors. California law sets an order of priority for paying any debts from the assets of an estate. Some debts are given higher priority than others, and much like a bankruptcy case, the lower priority creditors may receive nothing from an insolvent estate.

The highest priority debts are those for “expenses of administration” related to the estate or its property. So if you own a house, the expenses necessary to keep the house running, or sell the property, would be considered an expense of administration. This category also includes such things as court costs and attorney fees.

The second-highest priority is for secured creditors. This most commonly refers to a mortgage on a property. Any such mortgage must be paid off before any lower-priority debts are paid.

The third-highest priority is for funeral expenses. This is followed by expenses of the deceased person’s final illness, i.e. medical bills.

The fifth-highest priority is for what is known as a “family allowance.” This refers to any amounts needed for a spouse or dependent child’s ongoing maintenance while the estate remains open. The specific amount of any such allowance is determined by court order.

The sixth-highest priority is for any claim for unpaid wages. In other words, if the deceased person hired someone as an employee and failed to pay wages for whatever reason, that employee would have a claim at this priority level. Finally, all remaining “general debts” share the lowest priority. This includes any unsecured debts such as credit card balances or money owed on a promissory note. General debts also include any unsecured portion of an otherwise

It should be noted that as a general rule, there is no priority within a given class. However, all debs within a given class must be paid before any debts of a lower priority. So, for instance, if a person dies and leaves two unpaid credit card bills, neither has priority over the other. If there is not enough money to pay both, the law requires each creditor be paid a “proportionate share” from the available assets.

Get Advice from an Estate Planning Attorney

Insolvent estates still require a good deal of administration. That is why you should not ignore estate planning even if you expect to have an insolvent estate. If you need assistance from a qualified California estate planning attorney, contact the Law Office of Scott C. Soady in San Diego today.

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