Priority of Claims Against an Estate
a.k.a. Settling an Estate’s Debts
Credit card debt, taxes, mortgages, vehicle loans, student loans, utilities – all of these are obligations that need to be paid by a deceased person’s estate. When a person passes away, ideally there will be enough resources in his or her estate to pay off any outstanding debts in full.
Unfortunately, we don’t live in an ideal world.
When an estate is insolvent (i.e. it does not have enough assets to pay of its debts), certain debts get more favorable treatment (“priority”) than others. If you are familiar with the bankruptcy process, this list may look familiar.
1. Costs and expenses of administration; (i.e. the lawyers get paid first)
3. Funeral expenses up to $4,000;
4. Debts and taxes with preference under federal law;
5. Medical and hospital expenses of the last illness of the decedent up to $2,150 for each hospital/nursing home and $425 for each person furnishing services or goods;
6. Debts and taxes due the Commonwealth;
7. Debts due as trustee for persons under disabilities; as receiver or commissioner under decree of court of the Commonwealth; as personal representative, guardian, conservator, or committee when the qualification was in the Commonwealth; and for moneys collected by anyone to the credit of another and not paid over, regardless of whether or not a bond has been executed for the faithful performance of the duties of the party so collecting such funds;
8. Debts for child support arrearages;
9. Debts and taxes due localities and municipal corporations of the Commonwealth; and
10. All other claims.
The process is fairly straightforward: The estate first pays all its creditors that fall under the first category. If there is not enough in the estate to pay all the creditors in the first category, what money the estate has is divided proportionately amongst the creditors, and the estate is done. If there is enough to pay all the creditors in the first category, the estate then moves on to pay creditors that fall under the second category.
This process is repeated until there is nothing left in the estate. If you are a creditor in category Number 10, but the estate ran out of money back at category Number 7, that’s too bad. With limited exceptions (typically involving fraudulent transfers prior to the decedent’s death), creditors cannot go after estate beneficiaries or surviving family members for the outstanding debts of a decedent.