IV. HANDLING CREDITORCLAIMS AND DEBT
- Sample Forms and Required Notices Needed
NOTICE TO CREDITORS is covered in Section IV below.
Court Clerks send out a statutory notice to creditors.
(a) Except as provided in subsection (e), it is the duty of the clerk of the court in which an estate is being administered, within thirty (30) days after the issuance of letters testamentary or of administration, to give, in the name of the personal representative of the estate, public notice of the personal representative’s qualification as such by two (2) consecutive weekly notices published in some newspaper of the county in which letters testamentary or of administration are granted, or, if no newspaper is published in that county, by written notices posted in three (3) public places in the county, one (1) of which shall be posted at the usual place for posting notices at the courthouse.
(b) The notice shall be substantially in the following form:
NOTICE TO CREDITORS
Estate of _______________ (name of deceased)
Notice is hereby given that on the __________ day of __________, 20___ letters testamentary (or of administration as the case may be) in respect of the estate of _______________ (name of deceased) who died __________, 20__________ were issued to the undersigned by the __________ court of _______________ County, Tennessee. All persons, resident and nonresident, having claims, matured or unmatured, against the estate are required to file the same with the clerk of the above named court on or before the earlier of the dates prescribed in (1) or (2), otherwise their claims will be forever barred:
(1)(A) Four (4) months from the date of the first publication (or posting, as the case may be) of this notice if the creditor received an actual copy of this notice to creditors at least sixty (60) days before the date that is four (4) months from the date of the first publication (or posting); or
(B) Sixty (60) days from the date the creditor received an actual copy of the notice to creditors if the creditor received the copy of the notice less than sixty (60) days prior to the date that is four (4) months from the date of first publication (or posting) as described in (1)(A); or
(2) Twelve (12) months from the decedent’s date of death.
This __________ day of __________, 20___.
Attorney for the Estate _______________
Tenn. Code Ann. § 30-2-306
Just because the Notice is published by the Clerk does not mean it is sufficient notice to a known creditor. The statute additionally requires the personal representative to send out notice to known creditors. Unless the Decedent died over a year before letters were issued by a court.
(d) In addition, it shall be the duty of the personal representative to mail or deliver by other means a copy of the published or posted notice as described in subsection (b) to all creditors of the decedent of whom the personal representative has actual knowledge or who are reasonably ascertainable by the personal representative, at the creditors’ last known addresses. This notice shall not be required where a creditor has already filed a claim against the estate, has been paid or has issued a release of all claims against the estate.
(e) The requirement of subsection (a) shall not apply if the letters testamentary or of administration are issued more than one (1) year from the decedent’s date of death.
Tenn. Code Ann. § 30-2-306
It is my practice to send a copy of the statute on how to make a claim along with the notice in a certified letter to each known creditor. Doing so takes little effort and estops creditors from most claims they did not understand how to make a claim. The next question is should the attorney send the notices, or should the attorney let the personal representative send the notices. If you let the personal representative send the notices you might do well to send a letter to the personal representative explaining the importance of actually sending the notices and the harm that can accrue from not sending them.
My letter to creditors is as follows:
Re: The Estate of ____________
Account Number _____________________
Dear Sir or Madam:
This letter is to advise that I represent the Estate of _____________________. Enclosed please find a copy of the Proof of Publication and Notice to Creditors for the above referenced Estate as well as a copy of Tenn. Code Ann. §30-2-307 which sets out the law regarding filing claims. Please follow the instructions on these papers or contact the Probate Court Clerk’s Office in Davidson County on how to file a claim. The claims are not filed with me or in my office. However, if you are going to file a claim against this Estate, please be kind enough to send an extra copy of that claim to me.
KARL D. WARDEN
Many creditors will continue to send letters to the family, the attorney, or both despite having a notice from the attorney. I am even getting monthly requests for an estate status report from some creditors who have not filed a claim. While the personal representative of the estate has a duty to treat creditors fairly, that duty does not extend to holding their hands, or giving legal advice. I do send the inventory to creditors when an estate is likely to be insolvent. Just remember, when you communicate with a creditor you are likely communicating with someone who is driven solely by what their computer screen tells them to do. Don’t expect logic to rule the day. They can figure out whether or not it is worth paying the money to make a claim on their own after that. Creditors who are owed one thousand dollars ($1,000) or less in principal amount the claim may be paid without requiring a claim to be filed. Tenn. Code Ann. § 30-2-311. This is a useful exception, especially where credit needs to be maintained for a while.
You will need to fill in a TennCare waiver form for any person who dies at age 55 or over.
(B) Within sixty (60) days of the date of issuance of either letters of administration or letters testamentary, the personal representatives of decedents shall provide notice of the death of any individual fifty-five (55) years of age or older to the bureau of TennCare, in a format to be specified by the bureau, shall state whether the decedent was a TennCare recipient and shall request a release from the bureau of TennCare pursuant to subdivision (c)(2), and an affidavit confirming notice shall be filed pursuant to § 30-2-301(b)(3);
Tenn. Code Ann. § 71-5-116
While, as the statute says, you can do an affidavit in some counties, I strongly suggest you get the waiver. It is a small amount of work that can avoid problems down the road. For instance, given the lack of a definitive statute of limitations for a TennCare estate claim, title insurance companies are not thrilled about issuing title insurance where there is no TennCare release.
- Priority and Payment of Claims
Priority of payment of claims is set forth with particularity by statute in Tennessee.
(a) All claims or demands against the estate of any deceased person shall be divided into the following classifications, which shall have priority in the order shown:
(1) First: Costs of administration, including, but not limited to, premiums on the fiduciary bonds and reasonable compensation to the personal representative and the personal representative’s counsel;
(2) Second: Reasonable funeral expenses;
(3) Third: Taxes and assessments imposed by the federal or any state government or subdivision of the federal or any state government, including claims by the bureau of TennCare pursuant to § 71-5-116 and including city and county governments; and
(4) Fourth: All other demands that may be filed as aforementioned within four (4) months after the date of notice to creditors.
(b) All demands against the estate shall be paid by the personal representative in the order in which they are classed, and no demand of one class shall be paid until the claims of all prior classes are satisfied or provided for; and if there are not sufficient assets to pay the whole of any one class, the claims in that class shall be paid pro rata.
(c) Debts due upon bills single, bonds, bills of exchange and promissory notes, whether with or without seal, and upon settled and liquidated accounts signed by the debtor, are of equal dignity, unless otherwise provided, and are to be paid accordingly.
(d) The personal representative shall hold aside sufficient funds or other assets to pay each contested or unmatured claim (or the proper ratable portion thereof, as the case may be) with interest (if the claim be one bearing interest), until it is determined whether or not the claim is to be paid, or until an unmatured claim has reached maturity, also sufficient assets to meet the expenses of pending litigation and costs of court and any unpaid taxes.
Tenn. Code Ann. § 30-2-317
- Late Claims and Contested Claims
When creditors do make a claim you the attorney and the personal representative have several choices to make. Claims where the debt is secured by a valuable asset of the estate probably ought to be paid, or other arrangements made, as soon as possible to preserve the asset. Unsecured claims such as credit cards are another thing. If the credit card is on the name of the decedent and the surviving spouse paying the claim, or making other arrangements, is a good thing. When the debt is solely in the name of the decedent there is a practical choice to be made. Experience has demonstrated that credit card creditors who make a claim hardly ever show up for a hearing on that claim if a timely exception is made. In other words, the claim can be dismissed. It cannot, however, be dismissed just because the creditor did not show up. Nor should an exception to a credit card claim be made solely on the basis of they probably won’t show up. The exception and the order dismissing the claim should be made on a substantive basis, such as not knowing if all the charges were authorized, or payments were not credited, etc. Making an exception to a claim and appearing at a hearing on that exception cost money. So, be sure the client is aware of the cost/benefit ratio on smaller claims unless several can be scheduled together at the same time.
Tenn. Code Ann. §§30-2-307 and 310 set a 12 month from date of death statute of limitation for filing a claim. Creditors can open an estate as a creditor if they think the family is waiting out the 12 months. It used to be that clerks would not even file a claim if that claim was made more than 12 months from the date of death. That is no longer the case. It is not a good idea to ignore a late filed claim unless the amount is so small that it makes no difference.
The exceptions to the 12 month statute are taxes and TennCare. Discussion of the TennCare time limit could take up a tome and will have to be the subject of another CLE.
Sending creditors specific notice is a good idea for reasons other than it is a statutory duty. Creditors who have notice have four months from the date of notice to file a claim or forever hold their peace.
(2) However, if the filing of the claim as permitted by § 30-2-307(a) occurs after the date that is four (4) months from the date of the notice to creditors, the personal representative, or any party interested in the estate either as creditor, distributee, heir or otherwise, may except to any claim by filing written exceptions in triplicate with the clerk of the court in which the estate is being administered; provided, that the exception is filed no later than thirty (30) days from the date the personal representative receives notice from the clerk of the filing of the claim.
Tenn. Code Ann. § 30-2-314
When combined with Tenn. Code Ann. § 30-2-307, this means a distribution may be made sooner than 12 months from the date of death in an estate as long as everyone is sure all the creditors were notified.
Before the date that is twelve (12) months from the decedent’s date of death, the court may permit the personal representative to distribute the balance of the estate in accordance with § 30-2-701, make final settlement and enter an order discharging the personal representative. If a creditor files its claim after the estate is closed as permitted in the preceding sentence and before the date that is twelve (12) months from the decedent’s date of death, the personal representative shall not be personally liable to the creditor whose recourse will be against the distributees of the estate, each of whom shall share liability on the claim in proportion to the claimant’s share of the residue. The burden of proof on any issue as to whether a creditor was known to or reasonably ascertainable by the personal representative, or as to whether actual notice was properly sent in accordance with § 30-2-306, shall be upon the creditor claiming entitlement to actual notice. In such cases, the distributees of the estate shall be personally liable on a pro rata basis if the court finds the claim is proper and the creditor did not receive the appropriate notice.
Tenn. Code Ann. § 30-2-307
While a personal representative can pay claims sooner than the expiration of the time for making claims it is not always a good idea.
(a) At any time prior to the expiration of the period fixed for the payment of claims, the personal representative may pay the preferred claims as provided in § 30-2-317 for which the estate may be liable, and upon order of court any debt of the decedent for which security may have been given that is in danger of being sold by way of foreclosure to the detriment of the estate.
(b) If the executor or administrator knows or is willing to undertake that an estate is solvent, the executor or administrator may pay debts, but if the executor or administrator pays any debts other than those specified in subsection (a) prior to the expiration of the time fixed for the payment of claims, and the estate proves insolvent, the executor or administrator and the sureties of the executor or administrator shall be liable to each and every creditor for the creditor’s ratable share of the insolvent estate.
Tenn. Code Ann. § 30-2-318
While most claims are heard in the probate court by the judge (at least in Davidson County) claims can be the subject of a jury trial at the request of the creditor or the personal representative.
(c) Should the claimant or the party excepting desire a trial by jury, it shall be demanded by that party in the first claim or exception filed. However, a claimant who has not demanded a jury in the claimant’s claim may do so within five (5) days after receipt of notice of the filing of exceptions to the claimant’s claim by filing a written demand for a jury with the probate court clerk.
Tenn. Code Ann. § 30-2-313
That jury trial can be in the circuit court. Tenn. Code Ann. § 30-2-314.
- Steps to Ensure all Debt is Located and Handled Correctly
The first way to determine who all the creditors are is speak with the client. They generally have a good idea who the creditors are. Next, is be sure to look at the US mail, email and at the bank account. Many bills come through the mail, although an increasing number of bills come through email or are paid automatically out of a bank account. Occasionally there are estates where the decedent did not share financial information. In such a case it might be a good idea to do a credit check on the decedent.
- What if the Assets Don’t Cover the Bills?
If I know up front that the assets of the probate estate do not include real property and will not cover the bills I suggest that the client go ahead and do an inventory and send the inventory with the notice to creditors. The creditors who actually read such things may decide to not waste money by filing a claim. The equation is different if there is real property. While real property does not normally become part of the probate estate unless the testator says so, real property can be brought into the probate estate if the estate is otherwise insolvent.
(a) If the personal property available appears to be insufficient to pay debts and expenses, the personal representative, or a creditor whose claim is duly filed, may, at any time, file a petition in the court in which the estate is being administered, for the sale of the decedent’s land, or so much of the land as may be necessary, regardless of the county in which the land lies; provided, if all of the land to be sold lies outside of the county of administration, the sale shall be held in the county in which such land lies upon such notice as may be prescribed by the court and the clerk shall file for record in the office of the register of deeds in the county where the land lies a certified copy of the decree confirming the sale or deed thereto and charge the expenses of sale and cost of recording as a part of the costs of the cause.
(b)(1) The surviving spouse, heirs, devisees, encumbrancers, and others interested in the realty, excepting creditors, shall be impleaded.
(2) No preliminary formal suggestions of insolvency need be made, nor advertisement for creditors other than that already made under the requirements of § 30-2-306.
(3) Nothing in the proceeding nor in any decree made in the proceeding, shall change the manner or affect the time for filing claims as provided in § 30-2-307.
(4) Hearings may be upon oral testimony.
(5) The court shall have the same powers as a court of chancery in like cases, and the mode of procedure, except as modified in this section, shall follow that prescribed for the conduct of such causes in chancery.
(c) If, upon the hearing, the court is satisfied that the personal estate is insufficient as mentioned in subsection (a), and that the land ought to be sold, it may decree the sale of the land in whole or in part, subject to subsequent confirmation by the court. The court is also empowered, in a like proceeding, to ratify contracts of private sale and to authorize the consummation of the contracts by the personal representative. Every deed made pursuant to such orders of court, whether issued as the result of a public or a private sale, and every decree of court divesting and vesting title shall be effective to divest all the right, title and interest, legal and equitable, in the property sold, and vest the title and interest in the purchaser.
(d) The heir or devisee whose land shall be sold has the privilege, either in this cause or by subsequent application, to compel all others holding or claiming under the decedent to contribute in proportion to their respective interests for the purpose of equalizing the burden of the loss.
(e) Nothing in subsections (a)-(d) shall be construed as divesting the jurisdiction or powers now possessed by the chancery court in respect of the administration of insolvent estates of decedents.
Tenn. Code Ann. § 30-2-402
There is a practical issue that may arise in an estate where the real property must be sold for debts, and even where it may not have to be sold for debt. That is the cost benefit ratio of selling the house through a realtor for the maximum potential price vs. selling through an auction to get rid of the burden of payments, taxes, and insurance as soon as is possible.
It is also well to read the statutes after Tenn. Code Ann. § 30-2-402, because you will see that selling real property if it does not need to be sold, ousting a resident, or failing to properly serve a minor carry real penalties.
The personal representative of an insolvent estate has the ability to file a notice of insolvency to the creditors. Tenn. Code Ann. § 30-5-102. Following that the personal representative should file a plan of insolvency.
(a) The notice of insolvency shall contain an accounting of assets that have come into the hands of the personal representative and a proposed plan of distribution in accordance with § 30-2-317.
(b) The notice shall bear, in a conspicuous manner, the following language: Objections to this proposed plan of distribution must be filed with the clerk within thirty (30) days from the date of receipt of this notice.
(c) If no objections are filed within the thirty-day waiting period, the personal representative may execute the proposed plan of distribution and close the estate, relieving the personal representative of any further liability to the estate.
Tenn. Code Ann. § 30-5-103
- Bankruptcy and Foreclosure
Because of the insolvent estate procedure there is little need for a probate estate to file for bankruptcy. The assets of the estate are what they are and are not likely to grow after the death of the person whose estate is in probate. In any event, an estate in probate is not a “person” within the meaning of the bankruptcy code and probate estates are not therefore eligible for bankruptcy. 11 U.S.C.A. § 101(41) On the other hand, people who are already in bankruptcy do die from time to time. Bankruptcy rules provide for that circumstance.
Bankruptcy Rule 1016 provides that on the death of a Chapter 7 debtor,
“the estate shall be administered, and the case concluded in the same manner, so far as possible, as though the death or incompetency had not occurred.”
In fact, a Chapter 7 should not generally be derailed by the death of the debtor as the estate does not include income and assets acquired after the filing.
A Chapter 13 bankruptcy, however, is a different animal. There, the debtor is supposed to be making payments. Unless there is some reason for the assets of the debtor to be taken into the bankruptcy estate, or otherwise disposed of by the creditors, assets are not part of the bankruptcy estate in a Chapter 13 bankruptcy. The death of the debtor then leaves the family/beneficiaries/heirs with some choices:
Do Nothing: This will eventually get the bankruptcy case dismissed. Doing nothing is certainly inexpensive unless there is an asset of the decedent someone wants like real property that secures a debt in the bankruptcy.
Dismiss the Case: A more official version of doing nothing.
Ask For a Hardship Discharge: A hardship discharge can be granted by the bankruptcy court if all required Chapter 13 plan payments have not yet been made. If granted, all dischargeable debts will be wiped out and creditors cannot come after the deceased debtor’s estate.
Convert to Chapter 7: Similar to a hardship discharge, survivors may ask the court to convert the case to a Chapter 7 in order to receive a discharge. Some courts are unenthused about doing this. So are some Chapter 7 Trustees. In other words, it may not work.
Continue the Chapter 13 Case: Courts also have discretion to proceed with and conclude the Chapter 13 as if the death had not happened. The court may order this if in the best interest of all the parties. This does mean someone is going to have to make the payments under the Chapter 13 Plan.