If a friend or relative dies and asks you to serve as his estate's executor, you are responsible for managing his final affairs and settling the estate. If the estate must go through probate, you must file the appropriate forms and oversee the process. If the deceased individual had unpaid debts, you must use the assets in his estate to pay them.
The executor is not personally liable for the deceased individual's unpaid debts, nor are the deceased individual's heirs. The law only requires the executor to pay the deceased person's debt using assets from the estate. If there aren't enough assets in the estate to cover the deceased individual's debts, the court will deem the estate insolvent and the executor must pay the debts in order of priority as determined by the deceased individual's state of residence.
The executor must inform all of the deceased individual's creditors of the death and give them a minimum amount of time to file claims against the estate. If the estate is insolvent, the executor must begin paying debts according to their priorities. The priority of debts in insolvent estates varies by state. However, most states require the executor to pay his own administration fee first, along with legal fees. Debts related to the deceased individual's final illness, tax debts and secured debts are typically next in line for payment. Unsecured creditors usually receive payment last.
Running Out of Money
If the executor depletes the estate's assets and some debts remain unpaid, he must send letters to the remaining creditors informing them that the estate is insolvent. In most cases, the creditors will write off the debts and stop attempting to collect them. If the executor knows he will run out of money before paying all of the debts within a certain priority class of creditors, he must pay all of the creditors in the class the same proportion of outstanding debt. For example, if the unsecured creditors are the next priority class to receive payment, but the remaining funds aren't sufficient to pay them all in full, the executor might pay each creditor 30 percent of his outstanding debt.
If the estate is insolvent, creditors can't collect from the executor or from the deceased individual's heirs unless they co-signed for the debt. Probated insolvent estates typically require the services of an attorney. If you are acting as executor for an estate that you know is insolvent, don't open probate unless you have sufficient funds to pay attorney fees. Otherwise, you may be liable for them.