When people die, they leave behind both assets and obligations. For example, let’s say a relative dies leaving behind assets worth $500,000, but also a mortgage, credit card debts, and other obligations worth $700,000. In this situation the estate is deemed insolvent because there are not enough assets to pay for the remaining debts. What happens to insolvent estates and what impact do they have on the families of the deceased person? Let’s take a look at some common situations.
Some creditors do not get repaid
Insolvent estate don’t have enough money to go around to repay all the creditors. Because of this some or all of the creditors may not get their money back from the estate. The creditors must file a claim and ask the estate to repay the money. State law will determine which creditors get paid first and which creditors go unpaid.
Gifts are used to pay creditors
If a person dies leaving behind a last Will and testament that allows for gifts, those gifts will be used to pay for the debt. This is known as abatement. State law also determines which property is used first and divides it into different types. If any gifts remain after any of the debts have been paid, they will go to the intended recipients.