Protecting your rights when a debtor dies.

What are your rights as a creditor when someone dies owing money to you or your business?

The answer depends on the nature of the debt, the size of the debtor's estate, and how the decedent held title to assets. Timing and procedural issues are also critical factors in analyzing a creditor's remedies. Once thing is certain--creditors have few excuses for sitting on their hands if they suspect or learn of a debtor's passing.

Creditor's Rights in Probate Estates

Upon initiating a request for the administration of a decedent's estate, the personal representative--an executor if named in a will or an administrator if the decedent died without a will--is required to publish a notice of the court proceedings. Upon receiving letters of administration from the court, the personal representative must also mail notices to all known or reasonably ascertainable creditors within four months. The personal representative is provided an additional period of 30 days to notify a creditor if the personal representative later becomes aware of the existence another claim.

Claims by creditors of the deceased must be filed with the court and served on the personal representative within 60 days of the date notice was provided by the personal representative, or four months after letters of administration are issued to the personal representative if no notice was provided to the creditor. The timely filing of a creditor's claim in the probate administration is a prerequisite to pursuing a lawsuit against the estate and may be excused only in limited circumstances, such as where the decedent was insured and the party suing limits its recovery to the limits of insurance coverage or where a party holding a security interest in property of the decedent expressly waives all recourse to any other estate property for satisfaction of the debt owed.

A creditor may be relieved from the statutory deadline for filing a creditor's claim upon petition to the court, but only if the creditor can show that the personal representative failed to serve notice as required by law or if the creditor was not aware of the facts giving rise to its claim against the deceased. A petition to allow the filing of a late creditor's claim must be filed within 60 days after the creditor became aware of the administration of the estate or of the facts giving rise to the claim against the decedent.

If a creditor's claim is timely filed, the personal representative (or the court in rare cases) has 30 days to accept or reject the claim. If the claim is approved, it is paid by the personal representative from the assets of the estate. If a claim is rejected, the creditor must sue the personal representative of the estate within three months. If a claim is not accepted or rejected within 30 days, the creditor has the option to treat the failure to respond as a rejection and proceed with an action against the estate.

Statute of Limitations 

California law places a strict statutory limit on initiating claims based on the liabilities of a decedent. The statute of limitations for filing contract, tort, or other claims generally bars the filing of claims more than one year after death, even when the creditor is unaware of the debtor's passing or the existence of its claim against the deceased.

If a creditor learns of the death of a debtor and is concerned that a decedent's family members may not seek the appointment of a personal representative within the one-year limitations period, the creditor may itself commence a pro bate administration and file a creditor's claim against the estate. The filing of a timely creditor's claim tolls the limitations period until the claim can be considered in the course of probate administration.

A party who fails to meet the procedural requirements for filing a timely creditor's claim may be out of luck if the limitations period is close to expiring, as a petition to file a late creditor's claim does not toll the statute of limitations and may be denied if the one-year limitations period has already expired.

Insolvent Estates

If an estate lacks sufficient funds to pay all general debts, unsecured creditors are placed at the end of the line, as the law provides preferences to statutory debts owed to the state or federal governments (including unpaid income taxes), expenses of administration, debts secured by a deed of trust or lien, payment of funeral costs and expenses related to the deceased's last illness, provision of allowances to surviving family members, and wage claims.

Property Passing Outside of Probate

A creditor's rights may be even further restricted if the decedent held the bulk of his or her assets in trust. While a trustor is generally limited in his ability to enjoy the benefits of trust property and protect the trust assets from his creditors during his life, an unsecured creditor's ability to enforce obligations or attach property may be significantly diminished after a trustor's death. A trustee may initiate of a creditor's claim process similar to probate administration to sort out a decedent's affairs, but the law generally imposes no obligation on a trustee to do so or to provide notice of a trustor's death to creditors. A creditor must pursue claims and exhaust the assets of a probate estate before seeking recovery from property held in trust.

Creditors may also face difficulties if a decedent held property in joint ownership. Although tenancy in common interests are available to satisfy a decedent's creditors, a creditor must execute on property held in joint tenancy during the lifetime of the debtor or the surviving joint tenant will be entitled to the property free from creditors' claims. If a decedent leaves a surviving spouse, California law provides procedures for the allocation and payment of separate and community property debts, although the classification of debt and community or separate property assets is often uncertain and subject to dispute.

Creditors' rights also may be severely limited if a significant portion of a decedent's assets consists of investments held in a retirement account. Assets held in qualified retirement accounts, such as 401 (k) plans, are protected by federal law and are generally exempt from attachment by creditors during life and after death. Individual retirement accounts are not subject to the same federal protections as qualified plans, but can also present significant hurdles to creditors.

The law imposes numerous deadlines and procedural requirements on creditors seeking payment after the passing of a debtor. The procedural complexities of probate administration demand careful attention and diligence, for a late filing or other noncompliance may bar a creditor's ability to pursue valid claims against a decedent's estate. Given the twisted thicket of laws limiting their rights, creditors are well advised to protect their rights by paying close attention to the location and health of those against whom they may have claims and seeking legal counsel upon learning of a debtor's passing.

William R. Burford is an attorney in the Trusts and Estates Department of Rutter, Hobbs & Davidoff Inc.