A creditor is any person or entity to whom the decedent owed money.
In California, different types of creditors have different types of rights during probate. Estates aren’t required to repay debts outside the statute of limitations, but executors must make a good-faith effort to assess any claims they receive. If a debt is found to be valid, it must typically be paid before the decedent’s heirs can receive their inheritance.
Read more to learn about the role of creditors in probate, or contact the Law Office of Kavesh, Otis & Minor today to speak to an estate administration attorney and schedule your initial consultation.
Why Creditors Have a Right to Stake Claims Against an Estate
Probate is a time-consuming process that must be initiated within months of the decedent’s death.
Before heirs can receive their inheritances, the executor or personal representative of the deceased person’s estate must take all of the following steps:
- File a petition to initiate probate in the deceased person’s most recent county of residence.
- Submit a copy of the decedent’s will for authentication.
- If the will is valid, the executor must notify all interested parties of their intent to commence probate. In California, “interested party” means the deceased person’s immediate family members, their named heirs, and certain types of creditors.
- The executor is responsible for inventorying and managing estate assets throughout the probate process. If a creditor submits a claim that is found to be valid, it must be repaid by the estate.
- Once creditors have been paid, the deceased person’s heirs may receive their inheritances from the remainder of the estate.
Executors are not only expected to notify creditors of impending probate proceedings—they are required to do so by law. Under the California Probate Code, estate executors typically have four months to provide written notice to the creditor. If they do not provide written notice, they could be held personally liable for any resulting losses.
The Types of Creditors Entitled to Collect on Past-Due Debts
In California probate, creditors against the estate typically fall into any one of several distinct categories. These include, but are not limited to, the following:
- Secured creditors. A secured creditor, or “secured party creditor,” is somebody who was given collateral in exchange for a loan. Unlike other types of creditors, secured creditors do not have to file a claim against the estate to enforce the right of recollection. Examples of secure loans include motor vehicle loans and home mortgages.
- Unsecured creditors. An unsecured creditor issues a loan or line of credit without receiving any form of collateral. Unsecured creditors must typically file a claim against the estate to be repaid. Examples of unsecured debt include credit cards, personal loans, and student debt.
- Contingent creditors. A contingent creditor is somebody who is owed money or would be owed money after a prespecified event occurs. Contingent credit may be governed by business contracts or other agreements, which does not always correspond to a set dollar amount.
- Judgment creditors. A judgment creditor is a person, or party, who is owed money as the result of a legal proceeding. Judgment creditors must file a claim against the estate, which is often easy for creditors who have already secured a court-ordered award against the decedent.
Aside from secured creditors, who already hold collateral, the executor must assess and verify any claim submitted against the estate. This is often easier said than done, especially if the executor is not an attorney or has little experience with California’s debt collection rules.
Unfortunately, it is common practice for unscrupulous debtors to suddenly appear during probate. Instead of submitting a claim in good faith, they could attempt to recollect debts that are outside the statute of limitations. In some cases, creditors may even try to coerce the estate’s heirs into repaying the decedent’s debts, even though heirs are very rarely required to do so.
The Role of Executors in Assessing Creditor Claims Against a California Estate
The estate’s executor is often the only person responsible for assessing and responding to creditor claims. In fact, executors are expected to be proactive throughout the probate process. Aside from sending initial notice of probate to prospective creditors, executors must also:
- Collect information about the deceased person’s outstanding debt.
- Investigate sources of debt that aren’t listed in the decedent’s estate plan, often by reviewing physical files, email accounts, and other correspondence.
- Send additional notices of probate if and when new creditors are identified.
If the executor receives a claim, they are expected to respond quickly. However, certain types of claims do not need to be repaid. Before issuing a response, executors must typically evaluate whether the claim is valid.
A creditor claim against the estate could be invalid if:
- The claim has been filed outside the statute of limitations
- The creditor fails to provide evidence that the deceased person owed them a debt
- The creditor fails to provide a contract or other documentary proof that the deceased person owed them a debt
- The creditor did not file their claim with their court
Since personal representatives owe a fiduciary duty to the estate, they must make a reasonable effort to ensure that they only repay valid debts. If an executor does not do their due diligence, they could be found liable for the estate’s losses.
Creditor Disputes During California Estate Administration
Although executors have a duty to refuse to pay invalid debts, creditors retain the right to challenge these decisions. If a settlement cannot be reached through direct negotiations, a creditor could file a lawsuit against the estate.
In general, executors are always required to defend the estate from unfounded or unreasonable creditor claims. They do not have to pay for legal representation using their own money, but they are entitled—and typically required—to use estate assets for the estate's defense.
Some of the most common triggers for litigation include, but are not limited to, the following:
Suspected Fraud
Some people know their estates will be subject to creditor claims and try to offload assets to their preferred heirs before passing away. However, if these transactions leave the estate insolvent or otherwise incapable of paying its debts, creditors sometimes have a right to alternate remedies.
Failure to Notify Creditors
Executors must notify all known and presumed creditors when they initiate probate proceedings.
Under most circumstances, executors cannot be held liable for making a simple mistake—especially if it is evident that they had been attempting to locate and notify other creditors.
However, creditors may still elect to file a claim or a contest if they believe the failure to notify was willful, negligent, or otherwise unlawful.
Rejected Claims
If the executor rejects a creditor’s initial claim, the creditor can either:
- Accept the decision without attempting to settle the debt
- File a claim against the estate in an attempt to secure a court judgment
In general, if a creditor claim proceeds to court, executors are expected to provide evidence justifying their decision to reject it.
Premature Distributions
If the executor distributes assets before creditors can submit their claims against the estate, this affected creditor or creditors can file a lawsuit to compel repayment. This could cause significant problems for the estate’s heirs, especially those who have already received or spent their inheritance.
