What Happens If an Estate Has More Debts Than Assets?

Sorting through a loved one’s finances after death can bring an unwelcome surprise: the bills add up to more than the estate appears to own.

There may be credit card balances, medical bills, taxes, loans, funeral expenses, or other obligations, while the estate has relatively little cash or property available to pay them.

When an estate does not have enough assets to cover its obligations, Virginia law determines how available estate assets are used. Family members should also not assume they have to make up the difference themselves.

The Estate’s Debts Come Before Distributions

The personal representative will need to get a clear picture of what the estate owns and what it owes.

Before distributing assets to beneficiaries, the estate’s debts and other obligations must be properly addressed. If there is not enough to pay everything, the personal representative cannot simply choose which bills to pay or pay them in the order they arrive.

Virginia law establishes an order of priority.

Not Every Creditor Is Treated the Same

When estate assets are insufficient, certain expenses and claims are entitled to payment before others.

Costs and expenses of administering the estate receive high priority, followed by certain statutory allowances and specified funeral expenses. Federal obligations, certain expenses related to the decedent’s last illness, state obligations, and other categories follow in the order established by Virginia law.

Creditors in a lower-priority category generally are not paid until the higher-priority categories have been satisfied. If there is not enough to pay all creditors within the same category, those creditors may receive a proportionate share of the available funds.

This is why the personal representative needs to understand the estate’s debts before making payments or distributions.

Do Family Members Have to Pay the Difference?

Being a family member or beneficiary does not make you personally responsible for a deceased person’s unpaid debts.

The situation may be different if you were already legally responsible for a particular debt, such as one you jointly owed. There may also be circumstances in which property received from the estate is subject to a creditor’s claim.

In other words, family members should not assume they have to pay an estate’s debts from their own money, but valid claims against the estate still need to be properly addressed.

What Happens to Property the Beneficiaries Expected to Receive?

An estate may not have much cash but still own a home, vehicle, investments, or other property.

Estate property may need to be used to satisfy debts and expenses before beneficiaries receive their inheritances. As a result, something left to a beneficiary in a will is not necessarily guaranteed to reach that person if estate assets are needed to satisfy higher-priority obligations.

This is also why distributing estate property too early can cause problems. The personal representative needs to know what the estate owes and what assets may be needed before making distributions.

If you are administering a Virginia estate and are concerned that its debts may exceed its assets, Wilson Law can help you understand the claims against the estate, the applicable payment priorities, and the steps required during administration. To schedule a consultation, call our office at 866-603-5973, or reach out through our website.