Family members and heirs are not the only people who have legal rights and obligations in the probate process. Part of the purpose of probate is to settle the estate, including the estate paying back creditors the money they are owed before the deceased’s heirs inherit anything. As a creditor, your hope is that this process goes smoothly and is more of a formality, but this is not always the case. Given the high stakes for a creditor, they may need their own attorney in the probate process.

How Creditors Collect Their Debts From an Estate

There are two types of creditors that may present claims during probate:

  • Unsecured creditors: Lenders who do not obtain assets as collateral for the loan, such as a credit card company or a personal loan
  • Secured creditors: Lenders who receive collateral and can seize the collateral if the loan is not paid back, such as a mortgage company

The executor has a legal requirement to notify creditors once the estate is in the probate process. Texas probate law requires three types of official notices:

  1. A general public notice, such as a notice in a newspaper in the county where the estate will be administered;
  2. A notice sent by mail to secured creditors the executor or administrator knows to have a claim against the estate; and
  3. A notice by mail to the Texas Comptroller of Public Accounts.

The executor or administrator has a choice as to whether or not they notify those known to be an unsecured creditor. All notices must be given within set timeframes set by the Texas Estate Code in order to give creditors a reasonable opportunity to collect any money they are rightfully owed by the deceased.

The creditor then has two options for how to respond and attempt to collect their debt, both of which require an affidavit stating all relevant information related to the claim and supporting documentation or evidence of the debt owed :

  • They can present the claim to the executor or administrator of the estate; or
  • They can present the claim with the court clerk; the clerk will then notify the executor or administrator.

The executor or administrator has 30 days to accept or deny the claim. If they do act or approve the claim within that time period, it is considered rejected and the creditor can file a complaint in probate court the challenge the denial. A judge will then decide the matter.

The Order in Which Creditors Are Paid by an Estate

The standard priority for creditor claims in Texas is generally:

  1. Federal tax liabilities owed to the Internal Revenue Service
  2. Funeral expenses and any medical expenses related to the decedent’s last illness or end-of-life (up to $15,000)
  3. Estate administration expenses
  4. Secured debts
  5. Outstanding child payments and interest accrued
  6. Texas state taxes (including penalties and interest)
  7. Any costs associated with incarceration
  8. Medical assistance payments (i.e. Medicaid)
  9. All other claims

As a creditor, you have a lot on the line during the probate process. This is your last chance to collect money owed from the estate, and if you are not successful, you may only be partially paid back or not paid back at all. If the executor denies the claim, you may be forced to fight to get your money. Towson Law works with creditors to assist them in the claims process, including when litigation is necessary.

Real Estate Investors May Have Special Issues in Probate

Debts are far from the only instance when the probate process will affect the rights of third parties. When real estate investors buy property, they perform a title check on the property to ensure there are no encumbrances and they can take full ownership of the property free of defects or claims. This process is often referred to as “clearing a title.”

Real estate investors depend on the probate process to take ownership of the property from the deceased and obtain a clear title. They cannot take full ownership unless the probate process has been completed because the beneficiaries or heirs may still have a claim on the property, even if it was sold to an investor. In that case, you may need to bring an action to “quiet title” the property. This act clarifies the ownership on a piece of property when the actual ownership is in dispute.

Real estate investors may also need the probate process if they had a tenancy in common with the decedent. Then, the heirs would own half the property. In that case, the probate process would be necessary to determine who owns the other half of the property. Real estate investors may need to engage the court in these cases in order to establish ownership.

A Recent Texas Law May Complicate Things for Creditors

Texas recently changed its laws in a way that could make things more difficult for creditors when it comes to real estate. As of 2015, the state now allows real property to be given to beneficiaries through a transfer on death deed (TODD), keeping it out of the probate process. However, the owner may have encumbered the property during their lifetime, unbeknownst to the beneficiaries. The creditors may then need to take action to recover their debts against the property. They would have two years to file a claim against the estate to collect their debts.

If the deceased died owing money or part of the property itself, there are additional special scenarios that may be relevant. Because of the nuances involved in both real estate law and Texas probate law, it is beneficial to consult with a Texas Estate Planning and Administration attorney when dealing with claims against an estate.

Creditors’ Claims on Homesteads

Homesteads are a specific type of property, generally meaning the primary residence of a person. For the purposes of probate, a “homestead” in Texas is no more than 10 acres of land and its improvements in an urban area or 100 acres of land and improvements in a rural area for a single person or 200 acres for a family.

According to Texas law, homesteads are exempt from seizure for the claims of creditors. This means creditors cannot take the property in order to pay off debt owed. However, there are a number of people who may place an encumbrance on a homestead during the probate process, including:

  • Mortgage creditors or those who provided financing for the purchase
  • Those who are owed taxes on the property
  • Those who provided work and material used in constructing improvements on the property pursuant to a written contract
  • People owed a partition of assets based on a court order (importantly, this could include an ex-spouse)
  • The refinance of a lien
  • A reverse mortgage holder

All of these are considered “encumbrances” because they impede what can be done with the property. For instance, if a homestead is inherited by a surviving spouse, that spouse may not be able to sell the property until the encumbrances are resolved.

Call a Texas Estate Administration Lawyer

Probate legal issues can be complex for both creditors and executors or administrators navigating the obligations of an estate to pay those creditors. Creditors also have a finite amount of time to act if they want to recover the money they are owed by an estate. Towson Law is experienced in the probate process and works with both executors and creditors to help them through this process. Call us today at (817) 856-0270 or fill out an online contact form to schedule your appointment.