An insolvent estate is an estate in bankruptcy. When the owner of the estate passed,they left behind a greater amount of debt than equity. This means the estate must be sold off in order to repay debts, but there may still be outstanding debts to pay. Depending on the structure of the debts, the inheritors of the estate may be asked to repay the loans. A judge will work to cancel or reduce debts in most cases in order to repay all outstanding balances with money earned from liquidating the estate.
Disadvantages of Using a Probate for an Insolvent Estate
If you decide to take an insolvent estate through probate, you will have the protection of the court each step of the way. This is the main reason beneficiaries decide to take the probate route to resolve an insolvent estate. However, the protection comes at a cost. You will likely find yourself deep in debt to attorneys and the court at the end of an insolvent estate probate process because the costs are only exacerbated by the insolvency.
No Nonintervention Powers
When you enter probate on a solvent estate, you have the power to ask for nonintervention of the court on certain issues. This allows you to resolve some debts on your own simply by repaying creditors out of the estate. You will save money by handling issues on your own. When an estate is insolvent, most jurisdictions will not permit nonintervention.
This means every single transaction must be run through the court. Similar to a bankruptcy proceeding, a probate on an insolvent estate freezes the assets and lets the court decide how to spend the money left behind. You will find yourself at the mercy of the court in even the smallest transaction, which can consume your time and money.
Insufficient Assets to Pay for Attorney
In probate, the attorney and court fees to resolve an insolvent estate are paid out of the estate. The attorney is paid first, and the remainder of the estate goes to pay off creditors. The creditors’ shares of the pot shrink as attorney fees go up. In some cases, the attorney fees may climb so high that nothing is left for the creditors.
Insufficient funds can be a problem in small estates where only a few thousand dollars are left to repay debts, even if the debts are small. Attorney fees will quickly eat up those few thousand dollars. You will be left with few options. One is to handle the probate and try to handle the debts on your own. The other is to enter probate and pay attorney fees out of pocket.
Time to Resolve Disputes
When you handle dispute resolution on an insolvent estate yourself, you can move at your own pace. You decide which creditors to engage first, and you decide which assets to liquidate immediately. You hand all of this over to the court when you enter probate. The court will then establish it’s timeline. This may, or may not, work with your goals to end the process quickly. Probate can take years to resolve an insolvent estate. While this time is daunting and the cost can be high, you should also keep in mind the alternative. If you decide to “go it alone” on resolving the issue, you lose the protection of the court. It can take just as long for you to personally verify and repay all debts as it would take the court. Do not let time be the reason to avoid probate, instead keep in mind it can be a serious disadvantage to go through the court system.
Alternatives for Handling Insolvent Estates
An insolvent estate does not have enough assets to cover liabilities at the time of the decedent’s death. As a result, the beneficiaries of the estate will inherent nothing. It is up to the beneficiaries to determine how the insolvency will be resolved. There is no correct way to handle the process, and each individual will have to choose based on the circumstances of the individual estate in question. The size of the estate, the types of debts remaining and the resources of the beneficiary will all come into play.
Choose Based on the Estate Size
For a relatively small estate, with only a few thousand dollars in assets at the time of death, the best method will be to either ignore the liabilities or to close them personally. As a beneficiary, you have no actual obligation to ensure debts are paid. You are not named on the debts, and the credit of the decedent will have no impact on you. This will not stop creditors from contacting you, however, so it may be best to resolve the estate personally.
You can liquidate the assets in the estate and repay the creditors a portion of the remaining cash equivalent to the portion of debt the decedent owed the creditor. If you were to move through probate, it is unlikely the estate would have enough cash to pay an attorney and still repay creditors, and you may be stuck with the bill. For a larger estate, probate may be a better option. By putting the estate in probate, you can remove yourself from personally making any decisions. The assets of the estate are liquidated, and attorney and court fees are paid out of this sum. Then, the remaining cash is used to repay creditors.
Choose Based on Types of Debts
If the debts in an insolvent estate are largely secured, it may be easy to resolve the debts by surrendering the collateral. You can carry out the process of voluntarily surrendering the assets, resolving the debts one by one. However, if the debts are largely unsecured, it will be harder to pay them off by surrendering collateral. Instead, you would have to liquidate each asset yourself, collecting the cash earned and repaying creditors personally. In this instance, entering probate may be a better option. The court can handle the liquidation process for you, and the court will determine how to negotiate repayment.
Choose Based on Personal Resources
If you have limited resources to handle the dissolution of an estate, it is best to avoid probate. Probate always runs the risk of resulting in legal fees. Without the cash to pay, probate is not a good option to you. However, if you have the cash on hand to cover this expense, probate can save you a lot of time and hassle. In the end, you may owe nothing at all.
Procedures for Handling Debts in Insolvent Estates
Insolvent estates are those where the decedent’s assets are not sufficient to cover debts after death. As a result, there will be no inheritance left to the beneficiaries of the estate, and those beneficiaries may further have a legal obligation to help resolve the debts. Thankfully, less than 10 percent of all estates are insolvent, so it is not likely you will have to face the problem. If you do, however, there are three main ways to handle debts in an insolvent estate.
Ignore the Problem
While creditors may try to convince you otherwise, in most states you have no obligation to meet the debts incurred by a decedent’s estate. The creditors can try to recover by contacting you or the court, but you have inherited none of the estate if it is insolvent, so you are not legally obligated to any of the property or the debts. The effectiveness of this strategy may partly depend on your state of residence and whether you inherited any property while the decedent was living. You may want to consult an attorney to learn if the creditors could attempt to contact you in any way and what rights you have if they do.
Handle the Debts Personally
If you have received the entire estate and found it to be insolvent, you may personally attempt to resolve debts. You can contact each creditor to verify debts owed and offer to surrender assets, to resolve those debts. This strategy can be time consuming. Furthermore, many creditors will attempt to take advantage of you in this situation. They are aware you are not the original debtor, so they may attempt to assess fees and charges against the estate and claim these charges were part of the original contract.
If you are not careful to follow the contracts and verify all debts, then you can end up paying more than is legally necessary for each debt. Always start by verifying all debts, assuring none are past the statute of limitations and knowing the legal obligation the estate has to repay any of the debts prior to negotiating with creditors.
Use Probate for the Debts
You may want to enter probate in order to resolve the debts. The main advantage of this is you have a court system to assure all debts are lawful and you are not overpaying. The court will work to reduce the total debts owed so the estate can cover it’s liabilities. Unfortunately, however, the court does not recognize your legal rights. As the beneficiary, you will not have the ability to handle any debts personally. Every single debt must go through the court, which can drive up court costs and probate expenses. Probate can be a very expensive process and this can add to the overall expenses of the estate itself.