How to Handle Probate When the Deceased Had Significant Debt or Liabilities
Oct. 7, 2025
When a loved one passes away, the last thing you want to deal with is a complicated legal process filled with financial uncertainties. Managing an estate with substantial debt can further complicate the probate process.
Probate is the court-supervised process of validating a will, paying off debts, and distributing the remaining assets to the beneficiaries. When an estate has more liabilities than assets, it is considered "insolvent."
This situation requires careful management to satisfy creditors according to a legal order of priority. Attempting to handle this alone can lead to mistakes that may result in personal liability for the executor or administrator. We provide the steady hand needed to manage these complications so that you can focus on your family.
However, understanding how probate works and working with an experienced estate planning attorney can ease your burden during this time, safeguard the estate's assets, and protect the interests of your heirs.
At Davidson Estate Law, we have guided countless families through challenging times with compassionate and clear-headed counsel. If you reside in Oakland, Walnut Creek, Berkeley, San Francisco, El Cerrito, Alameda, or anywhere in the San Francisco Bay Area, our firm is here to help.
The Executor's Role in Managing Estate Debt
When you are named the executor or administrator of an estate, you take on a fiduciary duty. This means you must act in the best interests of the estate and its beneficiaries. A primary part of this role is managing the deceased's financial obligations, from establishing a detailed inventory of all the estate's assets and liabilities, notifying existing creditors, and paying any outstanding debts.
Identify and Catalogue Debts
As an executor for a deceased's estate, you must first identify all outstanding debts. This can be a detailed process that involves reviewing the deceased's mail, bank statements, credit card bills, and credit reports. Some common types of debt you might encounter include:
Mortgage loans
Credit card balances
Auto loans
Personal loans
Medical bills
Student loans
Tax liabilities (income, property, etc.)
It is essential to be meticulous. Missing a debt can cause problems later and potentially reduce the number or value of assets passed on to the deceased's beneficiaries and heirs.
Notifying Creditors and Handling Claims
Once you've identified all assets and debts, you must formally notify any known creditors of the death. This starts a timeline for them to file a claim against the estate. Properly notifying creditors often involves sending written notices to all known or reasonably ascertainable creditors as well as publishing notice in a local newspaper to inform any unknown creditors.
Once notified, creditors have a specific period to submit a formal claim. As the executor, you will review each claim to determine its validity. You have the authority to accept, reject, or negotiate a claim. If you reject a claim, the creditor may sue the estate, which is another reason why having legal counsel is so valuable. An attorney can help evaluate the legitimacy of the claims and respond appropriately on behalf of the estate.
Prioritizing Debt Payments from Estate Assets
When an estate has debts, they must be paid before any assets can be distributed to beneficiaries. If the estate has enough funds to cover all liabilities, the process is straightforward. You simply pay the bills from the estate's accounts.
However, if the estate is insolvent, you cannot just pay creditors on a first-come, first-served basis. You must follow a legal priority order for payments. Selling estate assets, such as real estate, vehicles, or valuable personal property, may be necessary to generate the cash needed to pay these debts. An experienced attorney can guide you through the process of liquidating assets in a way that is compliant with court requirements and maximizes value for the estate.
What Happens to Debt When There's Not Enough Money?
If the estate’s assets are completely exhausted after paying creditors according to the priority list, any remaining unpaid debts are typically discharged. This means the creditors cannot collect any more money.
A common concern for heirs is whether they will be required to pay the deceased's debts from their own resources. In almost all cases, the answer is no. Debt is not inherited. Creditors can only seek payment from the assets of the estate.
Once those assets are gone, the debt is generally uncollectible. There are some exceptions, such as if an heir co-signed a loan or jointly held a credit card account. However, you are generally not personally liable for a relative's debts or liabilities.
Paying Estate Debts in California
California law has a specific hierarchy for how debts and expenses must be paid from an insolvent estate. The executor must follow this order precisely. Paying a lower-priority creditor before settling a higher-priority one can make the executor personally liable for the difference. Under the California Probate Code, the order of payment priority is generally as follows:
Estate administration expenses: This category includes court filing fees, attorney fees, executor compensation, and other costs associated with managing the probate process. These get paid first.
Funeral expenses: Reasonable costs for the funeral and burial or cremation are next in line.
Expenses of the last illness: Medical bills and other costs related to the deceased's final illness have the highest priority.
Family allowance: The court may authorize a family allowance, which provides temporary financial support for the surviving spouse and minor children during the probate process.
Wage claims: Any wages owed to employees of the deceased for work performed within 90 days before their death are prioritized.
Secured debts: Debts secured by specific property, like a mortgage on a home or a loan on a car, are paid from the proceeds of selling that particular asset. If the sale doesn't cover the full debt, the remaining balance becomes an unsecured debt.
General unsecured debts: This is the final category and encompasses most other debts, including credit card balances, personal loans, and utility bills.
At Davidson Estate Law, we strive to help executors correctly classify and pay debts in accordance with this statutory framework, thereby protecting them from personal financial risk.
Estate Planning Attorneys in Oakland, California
Planning for the care and financial future of your loved ones is one of the most important things you can do. For over 25 years, Davidson Estate Law has been a trusted source of legal guidance and compassionate support for families across the San Francisco Bay Area in California. With offices located in Oakland, Walnut Creek, Berkeley, San Francisco, San Mateo, San Jose, and Larkspur, we serve clients throughout the area, including El Cerrito and Alameda.
Our attorneys understand how complex estate planning and probate can be, and we're committed to providing the legal guidance you need. Contact us today to schedule a free consultation and learn how we can help you create a will or living trust, administer an estate, or navigate probate court proceedings.