For the personal representative of an estate, proper handling of creditors' claims is critical. Liability issues aside, the estate may not close until payment of, or provisions for satisfaction of, all the decedent's debts are made. (Prob. Code, § 11640, subd. (a).) Failure to timely attend to the creditors' claim procedure may also delay or limit a requested preliminary distribution, which requires a showing that the distribution will not cause a loss to creditors or injury to the estate or any interested person. (Prob. Code, § 11621.)
Luckily, the creditor's claim procedure (Prob. Code, §§ 9000–9399) is straightforward and compliance is easy. This article will provide some quick tips on navigating the procedure.
Get the personal representative appointed. The very first thing is appointment of a personal representative. If there is a long delay before the court hearing on the petition for probate, financially complex estate, or other urgent need exists, consider requesting a special administrator to serve pending the hearing. (See Prob. Code, §§ 8540-8547.)
Reverse mortgages require urgency. Reverse mortgages become due and payable once the borrower dies, the time period to avoid a foreclosure is usually very short, around 30 days. As it is a lien on property, no creditors claim is required prior to the lender starting a foreclosure action. (Prob. Code, § 9391.)
Reverse mortgage companies will generally work with the personal representative, but can be aggressive at starting a foreclosure if a probate is not promptly initiated.
Gather information about the decedent's debts. To gather information about the decedent's debts, the representative can review the decedent's files, online accounts, and mail. The representative should forward the decedent's mail to themselves, and make arrangements to collect the decedent's mail pending the forwarding request becoming active. A title report on the decedent's parcels of real property may also reveal creditors.
If the representative lacks access to the decedent's online accounts, try checking the decedent's web browser's bookmarks and history files. These may list financial sites and credit card companies, indicating outstanding accounts. Bank statements may also reveal accounts set to “auto-pay.”
The personal representative should request the decedent's credit report, and the perfect opportunity to do so us when notifying the credit reporting bureaus of the decedent's death.
Be aware of creditors who do not need to file a claim. In addition to certain public entities, such as Medi-Cal (see Prob. Code, § 9200-9205), some creditors are not required to file a claim before proceeding with litigation, these include:
- Claims covered by insurance, if the claimant is not seeking to establish liability beyond the coverage of the insurance policy or policies. (Prob. Code, § 9390.)
- Enforcement of liens on the decedent's property. (Prob. Code, § 9391.)
- Certain claims based on the liability of a distributee. (Prob. Code, § 9392.)
Get your notices out early. Each known or reasonably ascertainable creditor must receive a Notice of Administration to Creditors (Judicial Council Form DE-157). While not required, including a blank Creditor's Claim (Judicial Council Form DE-172) is considered good practice. The notice limits the time in which a creditor may file a claim, and failing to timely file a claim bars the creditor from initiating a lawsuit on the claim.
Creditors must file their claim before the later of:
- Four months after the date letters are first issued (Prob. Code, § 9100, subd. (a)); or
- 60 days after the notice of administration is mailed or personally delivered to the creditor (Prob. Code, § 9100, subd. (b)).
Code of Civil Procedure section 366.2 creates a one-year statute of limitations on most claims against a decedent and this limitations period is not extended or tolled by the sixty day period for a creditor to respond to a Notice of Administration to Creditors. (Prob. Code, § 9100.) However, some claims are excluded from this limitations period, such as claims to enforce a lien. (Prob. Code, § 9391.)
“Known or reasonably ascertainable creditors” are the key words. Probate Code section 9050 requires that “the personal representative shall give notice . . . to the known or reasonably ascertainable creditors of the decedent.” If a creditor demands payment from the decedent or the decedent's estate, the personal representative is deemed to know of the creditor. (Id.)
It is better to over notice than miss a potential creditor. Representatives are under a duty to make reasonably diligent efforts to identify reasonably ascertainable creditors (Prob. Code, § 9053). The failure may allow a creditor to file a late claim in the estate. (See Prob. Code, § 9103 for requirements.)
In addition to the “usual suspects” (i.e., credit card companies and the like), other potential creditors include:
- Friends, family members, and heirs who paid the decedent's bills, funeral expenses, or other costs necessitated by the death and the administration of the decedent's estate.
- The decedent's caregivers or other household employees.
- Judgment creditors.
Parties suing, or threatening to sue, the decedent. (Filing of a creditor's claim is a prerequisite to initiating or continuing litigation against a decedent in many cases. See Prob. Code, §§ 9300–9392 for details.)
Calendar important dates. Important dates to calendar include the deadlines for:
- The creditors to file a claim;
- The personal representative's response to a filed creditor's claim;
- The creditors to file suit on a rejected claim; and
- Expiration of the one-year limitations period (Code Civ. Proc., § 366.2.)
Act on filed claims quickly. Once a claim is filed with the court and served on the personal representative, the representative must decide whether to accept or reject the claim. (See, Prob. Code, § 9250-9256.) The representative is allowed to reject and accept a claim in part. (Prob. Code, § 9250, subd. (a).) Rejections and approvals are given using the Allowance or Rejection of Creditor's Claim (Judicial Council Form DE-174).
Although a creditor may deem a claim rejected 30 days after a claim is filed (Prob. Code, § 9256), it is normally better to provide a formal rejection or partial allowance as soon as possible to start the 90-day period in which the creditor may commence litigation. Only a formal rejection, filed with the court and served on the creditor, will stop the tolling of the one-year statute of limitations that occurs upon the creditor filing the claim. (Prob. Code, § 9352.)
Watch for circumstances where court approval is required or otherwise wise. Although a personal representative authorized to act under the Independent Administration of Estates Act (IAEA) may allow or reject claims without court approval or a Notice of Proposed Action (NOPA) (Prob. Code, §§ 10552, 10500), court approval is sometimes required, and is other times wise. These situations include:
- The personal representative lacks authority under the IAEA to approve or reject claims without court approval (see Prob. Code, § 9250).
- The personal representative is the creditor. (Prob. Code, § 9252.)
- Circumstances indicating the possibility of a conflict of interest or self-dealing (e., the claim of a construction company owned by the spouse of the personal representative.)
Examine claims carefully. Although the personal representative is obligated to pay claims that are justly due, they should always scrutinize claims carefully for defects. Items to check include:
- Is the claim timely filed, including the one-year limitations period on actions against a decedent? (Neither the court or personal representative may allow or approve a claim barred by Code Civ. Proc., § 366.2; Prob. Code, § 9103, subd. (f).)
- Are facts supporting the claim stated in the creditor's claim?
- Where applicable, did the claimant include vouchers, documentary proof, or the written agreement on which the claim is made? (If not, the representative may demand them. Prob. Code, §§ 9151–9152.)
- Is the claim filed with the court?
- Did the claimant sign the creditor's claim form?
Be prepared to waive formal defects. The personal representative is allowed to waive formal defects in a claim, and may elect to treat a timely demand for payment as a properly filed claim. (Prob. Code, § 9154.) This is particularly useful for debts that are clearly not subject to dispute, such as a credit card or utility bill.
Of course, this blog is not a deep or complete dive into the creditor's claim procedure used against a decedent's probate estate (and optionally used in trust administrations with slightly different timelines, see Prob. Code, §§ 19000–19403.)