How is Debt Treated in Probate?
When a person passes away with debt, administration of the estate can be confusing for the family. On the one hand, you may have a will or trust that directs the distribution of assets to the beneficiaries. On the other hand, valid creditors have a right to be paid and made whole. For estates with significant assets and minimal debt, this is usually not a problem. The trustee or executor will pay the debt and move on to distribute the remaining assets of the estate. But what happens when there is not enough money to go around?
Debt Priority in Probate
If there is not enough money to pay all of the creditors of the estate, then certain creditors are given preference. The preferred creditors and parties will receive compensation from the remaining estate assets prior to the remaining creditors. In Illinois, the Probate Act, 755 ILCS 5/18-10 outlines seven classes of claims. Each class takes priority over claims in following classes.
Cutting off Creditors by Filing Probate
If the estate of a decedent has some debt, it may be wise in some circumstances to open a probate court proceeding so that creditors can be cut off (not allowed to collect). Illinois has a general two year limitation on collecting debt from a decedent’s estate if no probate has been filed. If a probate has been filed with general notice by publication, then the creditor has six months to file a claim in the probate proceeding, otherwise the debt is not collectible. If the administrator of the estate sends actual, written notice to the creditor then the creditor must file a claim in the probate proceeding within three months.
Therefore, filing probate and giving general notice often has the effect of cutting off creditor’s claims unless they file a claim in the probate proceeding, which they from time to time do not.
Co-Signing Student Loans and Mortgages
An increasingly significant debt burden for baby boomers are student loans for which they co-signed, and mortgages for their children for which they co-signed. Of course it was never intended for the parent to make payments on the debt, but technically these debts can be debts of the estate and the student loan servicer or mortgage company can seek redress from the estate. This may come as a surprise to the surviving spouse or siblings of the child who received the education or home. It is crucial for families to consider their co-signed obligations when making their estate plans. For more information regarding student loans and probate, see our article here.
Contact the Libertyville Probate Lawyers at Johnston Tomei Lenczycki & Goldberg LLC Today
If you had a loved one recently pass away and it has fallen to you to administer the estate, then it is important to consider the debts of the estate and understand how estate priority functions. Speak with a probate attorney to receive guidance on how to proceed in probate, or to determine whether probate can and should be avoided. The Libertyville probate lawyers at JTLG LLC will meet with you for a no charge initial consultation and propose the best course of action for the estate. As the administrator of the estate, it is important that you proceed with probate correctly so that you minimize probate claims, minimize estate tax, and not run afoul of the law and the beneficiaries. We regularly assist administrators/executors in probate administration and will make sure your plan fits the needs of the estate.
Phone Number: (847) 549-0600
Fax Number: (847) 589-2263
350 N. Milwaukee Ave., Ste. 202
Libertyville, IL 60048
223 N. IL. Rt. 21, Ste. 14
Gurnee, Illinois 60031