One role of an executor of a deceased person’s estate is to receive creditor claims and pay the creditors before distributing any remaining assets to the estate’s beneficiaries. However, a deceased person can leave behind more debts than assets. In such cases, an Iowa court can declare the estate to be insolvent. Then, the executor can pay some creditors while others may remain unpaid.
The United States Bankruptcy Code does not allow deceased individuals or their executors to file for bankruptcy. However, Iowa law requires executors to sell the assets of the deceased’s estate and use that money to pay the deceased’s creditors. Creditors must be paid in accordance with Iowa’s statutory order of priority which requires court costs, costs of administering the estate, funeral expenses and taxes to be paid before creditors. Then, certain medical and hospital expenses must be paid. Most unsecured debts, such as credit cards, are paid last.
Read More: Who Gets Paid First Out of a Deceased's Estate?
When Money Runs Out
Low-priority creditors simply do not receive payment when the estate’s money runs out, just as if the deceased had lived and had his unpaid debts discharged – or erased – in a bankruptcy case. Unsecured creditors typically write off the unpaid debts as business losses. Secured creditors – those whose debts are secured by collateral – can foreclose or repossess the collateral if there is not enough money in the estate to pay the debt.
If there are more debts than assets in the estate, the executor may petition the Iowa court to have the deceased’s estate declared insolvent. If some, but not all, debts in a certain class of debts can be paid, the executor must split the money evenly between creditors. For example, if there is $5,000 available to pay two credit cards that each have a $5,000 balance, each will receive $2,500 rather than one receiving full payment and the other receiving nothing.
If an estate is insolvent, the beneficiaries do not inherit anything since payments to beneficiaries are only made if all debts are paid. Beneficiaries are not liable to pay any of the deceased’s debts personally. However, if a beneficiary wishes to take over payments on a secured asset, such as a vehicle or home, because he wants to keep the asset, the creditor may permit the beneficiary to assume responsibility for the loan.
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