Which Debts are Discharged in Insolvency

Emily just received a notice of petition for bankruptcy from her husband’s estate. He’d been secretly accruing gambling debts for years, and now those debts – exceeding $150,000 – threaten to consume the assets she and their children rely on. She’s devastated, not just by the financial impact, but by the deception. This situation underscores a crucial point: understanding which debts survive a bankruptcy or probate proceeding is often more important than the process itself.

As an estate planning attorney and CPA with over 35 years of experience here in Escondido, I frequently counsel clients about the complex intersection of insolvency, probate, and creditor claims. The reality is, not all debts are created equal, and not all are wiped out. A blanket assumption of “discharge” can be a costly mistake. My CPA background is particularly valuable here, because understanding the tax implications – especially regarding step-up in basis and capital gains – is paramount.

What Happens to Debts When Someone Dies?

When a person dies, their debts don’t simply disappear. They become claims against the estate. The executor, appointed by the court, is legally obligated to identify, review, and either accept or reject those claims. This isn’t a simple “pay everything” exercise; there’s a strict priority order governed by law. Creditors aren’t automatically entitled to full payment, and some debts take precedence over others.

What Debts Typically Survive a Probate Estate?

Many debts are considered “priority” claims and must be paid before anything is distributed to heirs. These include:

• Administration Expenses: This encompasses the costs of probate itself – attorney’s fees, executor fees, court costs, appraisal fees, etc.
• Funeral Expenses: These are typically given high priority, though there are limits.
• Medical Expenses & Costs of Last Illness: Bills incurred during the final illness, including hospital stays and doctor visits, are usually prioritized.
• Family Allowance: The surviving spouse and dependent children are entitled to a temporary financial allowance during the probate process.
• Wage Claims: Unpaid wages earned before death have a priority, but are capped.
• Federal & State Taxes: The IRS and Franchise Tax Board will vigorously pursue outstanding tax liabilities.

Beyond these, general unsecured debts (credit cards, personal loans) fall lower on the priority list and may only be paid if sufficient assets remain. However, certain debts are legally non-dischargeable, meaning they survive even after the estate is exhausted.

Are There Debts That Can’t Be Discharged?

Yes. Several categories of debt are protected by law and continue to haunt beneficiaries even after probate closes. These include:

• Fraudulent Debts: Debts incurred through intentional misrepresentation or deceit are almost always non-dischargeable.
• Criminal Restitution: Court-ordered restitution payments to victims of crime survive probate.
• Child Support & Alimony: These obligations continue as a personal liability of the estate and often take precedence.
• Certain Tax Liabilities: While many taxes are dischargeable, specific federal taxes (like trust fund recovery penalties) or state taxes tied to fraud are not.
• Debts Incurred for Necessaries: Expenses for essential goods and services (food, shelter, medical care) provided to the deceased when they were incapacitated may survive.

What About Debts with a Personal Guarantee?

This is a critical area. If your spouse or a family member co-signed a loan or provided a personal guarantee, you remain personally liable for the debt, even if the primary debtor dies. Probate doesn’t shield you from that obligation. Personal guarantees cut right through the estate structure, forcing you to address the debt directly.

How Does the Claims Process Work & What are the Time Limits?

Creditors have a strict window to file a claim: either 4 months after Letters are issued or 60 days after notice is mailed (whichever is later). Once this period expires, unfiled claims are generally forever barred, protecting the heirs. Probate Code § 9100 dictates these deadlines. However, certain entities – like the government – have extended deadlines. The executor has a mandatory duty to send specific notice to the Franchise Tax Board, Victim Compensation Board, and Medi-Cal (DHCS) within 90 days of appointment. Failure to notify these agencies pauses their statute of limitations, allowing them to claw back assets years later, as detailed in Probate Code § 9202. If an executor rejects a creditor’s claim (using Form DE-174), the creditor has exactly 90 days to file a lawsuit in civil court. If they fail to sue within this window, the claim is legally dead (90-Day Suit Window – Probate Code § 9353).

What Happens if the Executor Pays the Wrong Debts First?

Executors must follow the legal order of priority. Debts are not paid first-come, first-served. They follow a strict hierarchy: (1) Administration expenses, (2) Funeral costs, (3) Medical/Last Illness, (4) Family Allowance, (5) Wage Claims, and finally (7) General Debts (credit cards). Executors who pay low-priority debts first can be personally liable (Probate Code § 11420). Furthermore, all debts bear interest from the date of death (or the date the claim is allowed) at the rate of 10% per annum (unless the contract specifies otherwise). Delaying payment unnecessarily drains the inheritance (Probate Code § 11423).

What failures trigger contested proceedings and court intervention in California probate administration?

Success in probate court depends less on the size of the estate and more on the accuracy of the petition and the behavior of the fiduciary. Whether the issue is a forgotten asset, a contested creditor claim, or a disagreement among siblings, understanding the procedural triggers for court intervention is the best defense against prolonged administration.

• Executor Authority: Secure executor authority letters if a will exists.
• No-Will Power: Obtain administrator authority letters if there is no will.
• Who is Involved: Clarify roles using key parties.

A stable probate administration outcome usually follows from clarity, consistency, and readiness for court review, especially when multiple stakeholders and competing interpretations are involved. When documentation supports enforcement and timelines are respected, families are less likely to face preventable escalation.

Verified Authority on Probate Creditor Claims

• The Creditor Window (4-Month Rule): California Probate Code § 9100
  This statute provides the primary protection for the estate. Generally, any creditor who fails to file a formal claim within four months of the executor receiving Letters is barred from collecting. This “clean break” is one of the main advantages of formal probate.
• Mandatory Notice to Public Agencies: California Probate Code § 9202
  Regular creditors aren’t the only concern. You MUST send specific notices to the Director of Health Care Services (Medi-Cal), the Franchise Tax Board, and the Victim Compensation Board. Missing this step keeps the liability window open indefinitely for the state.
• Priority of Payments: California Probate Code § 11420 (Debt Hierarchy)
  If an estate is “insolvent” (debts exceed assets), you cannot simply pay bills as they arrive. This code establishes the strict pecking order: funeral expenses and administration costs (lawyer/executor fees) get paid before credit cards and medical bills.
• Rejection of Claim (The “Sue or Lose It” Rule): California Probate Code § 9353
  When an executor formally rejects a claim (Form DE-174), the clock starts ticking. The creditor has exactly 90 days to file a civil lawsuit to enforce the debt. If they miss this deadline, the claim is barred, regardless of its validity.
• Personal Liability of Executor: California Probate Code § 9601
  An executor can be held personally liable for “breach of fiduciary duty” if they pay debts out of order (e.g., paying a credit card before the funeral home) or distribute assets to heirs before clearing all valid creditor claims.
• One-Year Statute of Limitations (Non-Probate): California Code of Civil Procedure § 366.2
  This is the ultimate backstop. Even if no probate is opened, creditors generally only have one year from the date of death to file a lawsuit against the decedent’s successors (e.g., trust beneficiaries). After one year, most debts expire automatically.