Creditors’ Claims against an Estate
When a lender learns that a borrower has passed away, in certain circumstances, the lender may assert a “claim” against the assets in the deceased borrower’s estate. Simply, this is a way for a lender to be paid on the outstanding obligation of a decedent/borrower.
In general, the process consists of filing a written claim with the appointed personal representative or court within the prescribed time limits. Assuming a claim is allowed, and assuming the deceased borrower’s estate has sufficient assets, the lender should receive payment or partial payment upon the closing of the estate.
It is the responsibility of the lender to make a timely, valid claim against the estate’s assets. Therefore, it is imperative that lenders determine when it should proceed with filing a claim and should monitor the status of the probate proceedings after a borrower’s death.
What is a Claim?
A “claim” is defined as “liabilities of the decedent, whether arising in contract or otherwise, and liabilities of the estate which arise after the death of the decedent, including funeral expenses and expenses of administration.” The term does not include taxes, demands, or disputes regarding title of a decedent to specific assets alleged to be included in the estate, tort claims, foreclosure of mechanic’s liens, or to actions pursued pursuant to Minn. Stat. § 573.02.
Has Probate Commenced?
A lender should receive notice of a pending probate proceeding by mail from the personal representative of the estate, through the publishing of notice in a legal newspaper, or by searching for an open probate proceeding through court records, located online at: http://pa.courts.state.mn.us/default.aspx.
If no probate action has been filed, a lender may file a Demand for Notice in the county where the borrower died. The demand asserts the lender should be notified whenever an order or filing is made with the court.
If a probate has not yet been opened, and a Demand for Notice has been filed with the court, the prospective personal representative must send a Notice of Intent to File Documents to the lender. A prospective personal representative of an informal probate must provide at least fourteen days notice to the lender before opening the probate.
Filing a Claim in a Probate Proceeding
After a probate estate has been opened, notice of the proceedings must be published for two (2) successive weeks in a legal newspaper in the county wherein the proceedings are pending. A creditor must file a claim against the estate usually within four (4) months after the first date of publication. If a creditor fails to timely present a claim, the claim may be barred by the personal representative, and the claim will not be paid.
The claim should include: (1) a written statement; (2) the basis for the claim; (3) name and address of the lender; (4) account claimed; (5) if the claim is not due, when it will be due; (6) if the claim is contingent or unliquidated, the nature of the uncertainty; and (7) if the claim is secured, a description of the security.
Because there are time limits on the opportunity of a creditor to make a claim against the estate’s assets, it is important that lenders swiftly determine whether it will be asserting a claim and identify the appropriate deadlines to avoid the claim from being barred, ultimately resulting in the claim remaining unpaid.
Payment on Claims
A personal representative may pay claims when there are sufficient assets in the estate or when the probate proceedings are concluded. There are instances when claims may not be paid in full. When an estate is insolvent, claims are paid in the following order:
- Costs and expenses of administration;
- Reasonable funeral expenses;
- Debts and taxes with preference under federal law;
- Medical/nursing home expenses of the decedent’s last illness;
- Medical/nursing home expenses of the decedent’s final year of life;
- Debts and taxes with preference under Minnesota law and state taxes; and
- All other claims.
It is not uncommon for a decedent’s estate plan to have an asset protection component. This can mean that a deceased borrower’s estate may be set up in a manner which results in assets being beyond a creditor’s reach and probate is not necessary. Therefore, there is a possibility that there will be no assets available in an estate to pay a lender’s claim.