Making a Claim Against an Estate: What Happens if a Customer Passes before Paying?

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In our collection practice, we often have businesses come to us with the question: Can I still collect against a customer who has recently died? It can be an uncomfortable situation, but an individual’s passing does not change the fact that services or goods have already been provided – and those creditors left unpaid can feel stuck.

When an individual dies, his or her debts do not disappear. However, they are not passed on to their family members either (unless it was a joint debt, which we will discuss in detail below). Typically, outstanding debts can be collected from the decedent’s estate, which means getting familiar with the probate process in Virginia.

A Word about Virginia Probate

Probate is the court process by which an individual’s estate is distributed after they die. There are a number of estate planning mechanisms that can be used to keep certain assets out of probate, but in general, assets distributed by a will or if the estate is intestate (meaning there is no will), are overseen by a special court proceeding. In the Commonwealth of Virginia, there is no designated probate court; instead, probate is handled in the Circuit Court. To initiate the probate process, a will must first be recorded in the appropriate city or county circuit court. If the will specifies a personal representative (in other states, this is known as the “executor”), this person will step in to oversee the probate process. If there is no will or if a valid personal representative is not designated, the Court may grant administration to an appropriate individual.

Once a personal representative has been designated, he or she must begin collecting the decedent’s assets together. The personal representative’s responsibility is to pay all outstanding debts owed by the decedent and the administration expenses of probate before distributing the remaining assets to the decedent’s heirs.

File a Claim with the Personal Representative

After being appointed, the personal representative should notify creditors as soon as possible of the death. They should also give notice (this usually includes providing a death certificate) to credit reporting agencies and request a copy of the decedent’s credit report. This credit report will provide necessary information about any outstanding debts.  

For those creditors who have a claim against the deceased individual, this is the time to get involved. In order to secure a debt, the creditor should submit a claim both to the circuit court and to the personal representative. It is important to note that claims cannot be filed against trusts, guardianships, or conservatorships.

Once all claims against the estate have been made, the personal representative has a few choices. First, he or she will have to decide whether to accept or contest the claims. Second, he or she will have to determine whether there are enough assets in the estate to cover all valid claims. An estate that has more assets than debts is “solvent;” while an estate with more debts than assets is termed “insolvent.”

Establishing a Claim at the Debts and Demands Hearing

In many cases, the personal representative will accept the claim and simply pay it from the estate assets. However, if the personal representative decides to contest the claim or if there is a concern that there may not be enough assets to cover all debts, the personal representative can request a Debts and Demands hearing. This is a court proceeding used to determine the validity of claims against an estate and the priority of payment if the estate is insolvent.

When a Debts and Demands hearing is requested, the Commissioner of Accounts will set a time and date by which it should receive all demands against the estate and proof of each claim. It is the personal representative’s job to give written notice to any known claimant at least ten days before the hearing, and notice will also be published in the local newspaper at least ten days prior to the hearing date.

After the hearing, the Commissioner of Accounts has sixty days in which to file a report. This report will show which debts were sufficiently proven. If creditors object to the report’s findings, they can still file exceptions within fifteen days. Without any exceptions, the report will be confirmed after fifteen days, and the court will order that all valid debts be paid out of the estate.

What if There are Not Enough Assets in the Estate to Cover the Person’s Debts?

Determining whether an estate is solvent includes looking at all non-liquid assets in the estate, including personal property and real estate (other assets, including retirement accounts, life insurance policies, and brokerage accounts may pass to beneficiaries outside of probate, and they would not be included in the estate valuation for the purpose of paying debts). If there are enough valid claims against the estate that the liquid assets in probate will not suffice, the personal representative will need to liquidate as many of the deceased’s assets as is necessary to settle all outstanding debts.

If it still seems that there are not enough funds in the estate to cover debts after all assets have been liquidated, the estate is insolvent. In this instance, at least some of the debts owed by the estate will have to go unpaid. Commonwealth of Virginia laws provide the order in which creditors are to be paid in circumstances when the estate is insolvent.  

Co-Signers and Joint Debts

As explained above, when people die, their debts are generally not passed on to their heirs. However, there is an exception to this rule. If the debt was entered into jointly – meaning both the decedent and another person committed to the debt together – that other person will often be responsible for repayment of the entire debt. This includes contracts signed by two or more individuals with a “jointly and severally liable” clause, as well as contracts that are co-signed or guaranteed by more than one person.

Hire an Experienced Collection Attorney

If you are a business owner or private lender with outstanding debts owed by a recently deceased individual, all is not lost. Contact one of our experienced collection attorneys to help guide you through the process of making a claim and collecting your debt. We are always happy to answer questions at any time. Give us a call at 703-771-9740.