What happens if an estate cannot pay its debts?

If an estate cannot pay its debts in California, this is known as being “insolvent.” In most cases, the estate will not have enough assets to cover all the debts and expenses. In this situation, the probate court will first look to any property that is “non-probate” such as life insurance and other accounts with beneficiaries named, to pay off as many of the debts as possible. The next step is to look at other assets of the estate. The court appointed personal representative will need to sell any assets and use the funds to pay off remaining creditors. Unfortunately, there may not be enough money left to pay all of the debts. The creditors are usually paid off in order of priority with secured creditors given the first priority. If there are still debts remaining after the assets are liquidated, some of them may be forgiven. In addition, if the estate is left with insufficient funds to pay creditors, the court may also allow the estate to enter into an arrangement to pay the creditors over time. The court must approve the arrangement and make sure that the creditors receive fair repayment. In some cases, if the estate does not have enough assets to cover its debts, the court may order the personal representative to request that the creditors give up part of their debt to settle the estate. This is known as a “compromise of claims.” If the creditors agree, the court will then enter a “satisfaction of compromise” and relieve the estate of the remaining debts.

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What happens if an estate cannot pay its debts?

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