Paying the Creditors of an Estate
When a Pennsylvania resident dies, his or her assets must be collected and distributed according to the decedent’s will or the state laws of intestacy for those individuals who die without a will. However, when an individual dies, his or her outstanding debts do not die as well; as such, the decedent’s heirs will not receive any inheritance until all outstanding creditors of the decedent are paid. It is the responsibility of the estate’s personal representative to ensure that all creditors of the decedent are paid from the estate funds. In the unfortunate situation of an insolvent estate, the decedent’s heirs may not receive any inheritance at all. It is therefore very important that the personal representative understand his or her responsibilities in paying the creditors of an estate.
According to Pennsylvania law, the personal representative must advertise the decedent’s death in two newspapers (one of general circulation and one legal periodical) in the decedent’s county of residence for three consecutive weeks. Creditors have one year from the first advertisement to bring forth their claims for repayment. If the personal representative knows of any outstanding creditors, he or she must send notification to them so that they may present their claim. Creditors may submit their claims directly to the personal representative or file a formal claim with the Register of Wills for repayment. Once the personal representative receives notice of the claims, he or she will need to determine if the estate contains enough funds to pay all outstanding claims.
If the estate has enough money to pay all known creditors or anticipated creditors, the personal representative may pay the creditor claims are they come forward. It is very important that the personal representative understand that he or she cannot distribute funds to the beneficiaries until all creditor claims brought forward within the one-year period are paid, unless the estate is so large that the personal representative is assured that the estate has enough funds to pay any claims that may be brought forward following the advance distribution to the beneficiaries. If the personal representative distributes funds to the beneficiaries and the estate does not have enough funds to pay the claims brought within this one-year period, the personal representative will be personally liable for paying the creditors. Assuming that the estate has enough funds to pay all creditors, the personal representative may distribute the remaining funds to the beneficiaries once all administrative tasks are completed.
However, if an estate’s debts are greater than its available assets, the estate is insolvent. In this case, Section 3392 of the Pennsylvania Probate, Estates, and Fiduciaries Code lists the order in which creditor claims are to be paid. As such, if a personal representative suspects or knows that the estate is insolvent, he or she should not pay any creditor claims until all creditors have brought forth their claims during the one-year creditor period. Section 3392 states that all creditor claims shall be paid in the following order: (1) the costs of administering the decedent’s estate, which includes any probate fees, attorneys’ fees, or personal representative commissions; (2) the family exemption, which is $3,500.00 for each family member who resided with the decedent at the time of his or her death; (3) the cost of the decedent’s funeral and burial, the costs of any medicines, hospital care, nursing services, or Medical Assistance provided to the decedent within six months of his or her date of death, and the services performed for the decedent by any employees within six months of his or her date of death; (4) the cost of the decedent’s gravemarker; (5) the rent for the decedent’s residence for the six months immediately preceding his or her death; (5.1) any claims by the Commonwealth of Pennsylvania; and (6) all other claims, including the costs of medicines, hospital care, Medical assistance, nursing services, and/or rents furnished to the decedent for any period earlier that six months of the decedent’s date of death.
Category (1) claims are paid first, then Category (2), Category (3), and so on until there are no more funds available. Within each Category, all claims take equal priority; as such, claims within a Category may receive a pro rata share of the remaining estate funds if the funds are insufficient to fully satisfy all claims. It is therefore likely that, while some creditors of an insolvent estate will be paid in full, some creditors may not receive full satisfaction of their claim and some may not be paid at all. If this is the case, the personal representative may wish to consider filing a Petition for Adjudication with the Orphans’ Court to receive the Court’s permission to distribute the funds. At the very least, the personal representative should distribute an informal accounting and proposed schedule of distribution to all creditors before making any payments.
Due to the many considerations involved in paying the creditors of an estate, the personal representative must ensure that he or she fully understands the distribution rules and has a good understanding of the available estate assets prior to making any distribution.