Insolvent Probate Estates in California

These posts I am making from a past probate seminar I gave for NBI have generated a lot of interest. That’s great. I have a hunch this will generate the most. There are a lot of insolvent (BANKRUPT) probate estates in California. In many of these cases we can still put dollars in your pocket AND make it so the creditors can’t come after you once probate is done.   It’s totally legal too!

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An estate is insolvent if, at fair valuations, the sum of the estate’s debts is greater than all of the estate’s assets (Cal Civil 3439.02).

  1. Priority of payment of creditor claims.  PC 11420 sets forth the order of payment of the decedent’s debts, expenses of administration and charges against the estate.  If the estate is insolvent and there are insufficient assets to pay general debts, it may be necessary for the PR to pay a portion of each general debt, pro rata.  PC 11420 provides:

(a) Debts shall be paid in the following order of priority among classes of debts, except that debts owed to the United Statesor to this state that have preference under the laws of the United Statesor of this state shall be given the preference required by such laws:
(1) Expenses of administration. With respect to obligations secured by mortgage, deed of trust, or other lien, including, but not limited to, a judgment lien, only those expenses of administration incurred that are reasonably related to the administration of that property by which obligations are secured shall be given priority over these obligations.
(2) Obligations secured by a mortgage, deed of trust, or other lien, including, but not limited to, a judgment lien, in the order of their priority, so far as they may be paid out of the proceeds of the property subject to the lien. If the proceeds are insufficient, the part of the obligation remaining unsatisfied shall be classed with general debts.
(3) Funeral expenses.
(4) Expenses of last illness.
(5) Family allowance.
(6) Wage claims.
(7) General debts, including judgments not secured by a lien and all other debts not included in a prior class.
(b) Except as otherwise provided by statute, the debts of each class are without preference or priority one over another. No debt of any class may be paid until all those of prior classes are paid in full. If property in the estate is insufficient to pay all debts of any class in full, each debt in that class shall be paid a proportionate share.

  1. Compromise of claims.  If it is to the advantage of the estate, a PR may compromise or settle a claim against the estate (PC 9830).  However, if the time for filing creditor’s claim has not expired, authorization by Court order is required for a compromise or settlement of a claim.
  2. Fraudulently conveyed assets.  If there is a deficiency of probate assets the creditor’s can require the PR to recover assets fraudulently conveyed by the decedent before death (PC 9653).  This would apply if the decedent made a fraudulent conveyance or made a gift of property in contemplation of death.
  3. PC 10361 is a little used section related to selling over-encumbered real estate in a probate. It can be used to reduce the mortgage lien in an amount equal to costs of administration related to the sale (such as attorney fees!).
  4. Exhibit JBP-7  is a sample schedule of distribution from an insolvent case.  The case turned out to be totally insolvent but notice if any money had been left at line 15 it would have been distributed pro-rata amongst the general creditors.

PRACTICE POINTER:  When I see a case is possibly heading toward insolvency I often recommend waiting until the final petition to deal with all creditors.  That way you can clearly lay out in one place who is entitled to what.  Additionally, that would be noticed for everybody to show up in Court if they disagree.

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