What Happens If There’s Not Enough Money To Pay Creditors of A Florida Estate?

Posted By on October 28, 2015

Florida Personal Representatives Have A Fiduciary Duty to Creditors of the Estate

When someone dies in the state of Florida, the law allows for the creation of an “estate” to act as the owner of the decedent’s  property, real and personal, as well as the decedent’s debts (bills, taxes, etc.).  If a formal probate administration is opened, a personal representative is appointed by the Florida Probate Court to manage the estate including paying all legitimate claims of the estate and, after all claims have been paid and all fiduciaries (personal representative and attorney) have been paid, distribute the decedent’s assets to the rightful owners (heirs, beneficiaries, creditors, and the like).

Once appointed, the personal representative’s work is supervised by a probate judge until his or her work is completed.  Once completed, the judge then releases the p.r. from further responsibility by signing a court order. The work of a personal representative can take months, or even years to complete.

 

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Asset Management of a Florida Estate

Some of the biggest jobs of the Florida personal representative is to collect the decedent’s assets and to make reasonable and prudent investment of those assets. Also, the p.r. is required to make sure that ongoing bills are paid, like the monthly car payment or mortgage payments on the home or condo. Juggling the duty to protect the estate’s assets while making sure that debts are paid can be a problem for a personal representative who has to deal with an estate with little or no liquidity.

In these instances, the personal representative may have to make decisions about which assets to sell in order to cover the estate’s liabilities (in some situations, court approval may be necessary to sell certain assets because the court restricted the personal representatives authority by stamping instructions on the Letters of Administration). Alternatively, the p.r can opt to borrow money to cover the estate’s expenses and cash needs.

However, what happens when there isn’t enough cash or assets in the estate to cover creditor claims, taxes, and the administration expenses like the estate lawyer and its accountant? What happens then?

What Happens When the Estate Doesn’t Have Enough Money to Pay Creditor Claims?

The Florida Probate Code outlines for the Personal Representative, as well as all other interested parties, what must be done in situations where the estate simply doesn’t have enough to pay all of the debts of the estate. Before claims are paid, the Personal Representative must first make a “reasonably diligent search” to determine who the creditors are (names and addresses) and then give them prompt notice (by publishing and/or serving a Notice To Creditors) that if they have a claim against the estate then should file the claim within the creditor period (3 months from publication or 30 days from date of service upon the creditor, whichever is later).

After that notice to creditors is published, and the creditor period runs, the Personal Representative is required to file a verified statement with the probate court that he or she, among other things, has made a diligent search of the names and addresses of any creditors and other persons having claims or demands against the estate.

Once this has been completed, the Florida Probate Code then provides a schedule of who gets paid first. This is called the “Priority of Payment” list and it appears in Florida Statute 733.707. There are eight classes in this list. The first class gets first priority, the second class gets second priority in payment, etc.

From the statute:

(1) The personal representative shall pay the expenses of the administration and obligations of the decedent’s estate in the following order:
(a) Class 1.—Costs, expenses of administration, and compensation of personal representatives and their attorneys fees and attorneys fees awarded under s. 733.106(3).
(b) Class 2.—Reasonable funeral, interment, and grave marker expenses, whether paid by a guardian, the personal representative, or any other person, not to exceed the aggregate of $6,000.
(c) Class 3.—Debts and taxes with preference under federal law, claims pursuant to ss. 409.9101 and 414.28, and claims in favor of the state for unpaid court costs, fees, or fines.
(d) Class 4.—Reasonable and necessary medical and hospital expenses of the last 60 days of the last illness of the decedent, including compensation of persons attending the decedent.
(e) Class 5.—Family allowance.
(f) Class 6.—Arrearage from court-ordered child support.
(g) Class 7.—Debts acquired after death by the continuation of the decedent’s business, in accordance with s. 733.612(22), but only to the extent of the assets of that business.
(h) Class 8.—All other claims, including those founded on judgments or decrees rendered against the decedent during the decedent’s lifetime, and any excess over the sums allowed in paragraphs (b) and (d).

The statute also explains exactly what should happen if there’s not enough cash to cover all these bills. If there isn’t enough left in the estate after paying one class to pay all of the next class in line, then that succeeding class is paid ratably in proportion to the amount of the obligation. Florida Statute 733.707(2).

Note: if there is a revocable living trust created by the decedent, those trust assets must be used to pay the creditors here once the Personal Representative certifies that there’s not enough in the estate itself to do so. See, Florida Statute 733.607(2).

The Case of the Estate and the Unpaid Credit Card

In the case of Chase Manhattan Bank, USA, N.A. v. Estate of Silveira, 815 So. 2d 770 (Fla. Dist. Ct. App. 2002),  Chase Manhattan Bank, USA, N.A., had a credit card claim against the Estate of Patricia Silveira.

Mrs. Silveira died without a will in January 1999. Her husband was appointed to act as Personal Representative of her estate. He filed a Statement of Claim for $14,289.10, which was the balance left due and owing on her credit card. He identified it as a Class 8 claim under the Priority List (see above).

Medical expenses and attorneys’ fees were paid by the Personal Representative, and there was nothing left after that to pay the creditors’ claims. So the widower petitioned the probate judge for an Order Striking Class 8 Claims, asking that the court strike the Class 8 claims so that he could be discharged as personal representative and the estate closed.

Chase Bank didn’t agree. They wanted to keep their credit card debt alive. They didn’t dispute theirs was a Class 8 claim.  They argued that insufficiency of estate assets was not a valid reason to strike a creditor’s claim. The probate judge allowed it to be struck, but the appeals court reversed him.

They ruled that the Florida Probate Code did not provide that a personal representative can strike a claim due to insufficient assets in the estate. On the contrary, Florida Statute 733.903 allowed for the administration to continue after discharge in the event that additional money is recovered by the estate.

The husband, as personal representative could be discharged from the job. A final settlement of the estate could be filed.

But the debt could not be erased by the personal representative: Chase could keep its hope alive — however remote it might be — that in the future, assets might appear that could be used to pay its obligation.

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Picture of Larry TolchinskyDo you have questions or comments? Then please feel free to send Larry an email or call him now at (954) 458-8655.

 

 

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