Probate, trust, guardianship and inheritance litigation
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Can an Estate Go Bankrupt?

By:  Jeffrey Skatoff, Esq.

No.  An estate is not eligible to file for bankruptcy protection under the United States Bankruptcy Code.  As explained in In Re Taplin, 641 B.R. 236 (E.D. Cal. 2022):

The Bankruptcy Code provides that only a ‘person’ that resides or has a domicile, a place of business, or property in the United States, or a municipality, may be a debtor under the Bankruptcy Code. 11 U.S.C. § 109(a).

The term ‘person’ includes individual, partnership, and corporation, but, except for potential eligibility to serve on a chapter 11 creditor’s committee, does not include a governmental unit. 11 U.S.C. § 101(41)…

§ 101(41) “person” is a subset of the broader definition of “entity.” The defined term “entity” includes “estate, trust, governmental unit, and United States trustee,” in addition to “person.” 11 U.S.C. § 101(15).

As a decedent’s estate is not an individual and not a partnership, it could be a debtor only if it could be analogized to the defined term “corporation.”

The defined term “corporation” includes: (1) association with a power or privilege that a private corporation, but not an individual or partnership possesses; (2) partnership association that is organized under a law that makes only capital subscribed responsible for the debts of such association (but not limited partnership); (3) joint stock company; (4) unincorporated company or association; (5) business trust. 11 U.S.C. § 101(9).8

To argue that the § 102 (3) rule of construction enables the term “corporation” to encompass decedent’s estates would stretch the concept beyond the breaking point. The limiting principle follows from the inclusion in § 101(15) of “estate” as a subset “entity” but not “person.” An “estate” cannot become a “person” by way of the term “corporation” without contradicting § 101 (15).

Basic statutory construction implies that use by Congress of the defined term “person” within the defined term “entity,” means that the other categories specifically named in the definition of “entity” such as “estate” or nonbusiness “trust,” were not intended by Congress to be a “person.” 11 U.S.C. § 101(15).

When enacting the Bankruptcy Code, Congress explained that the “definition [of “person”] does not include an estate or a trust, which are included only in the definition of “entity” House Report No. 95-595, 95th Cong., 1st Sess. 313 (1977); Senate Report No. 95-989, 95th Cong. 2d Sess. 24-26 (1978).

What Happens When an Estate Cannot Pay Its Debts?

All of the assets in the estate pay expenses of administration first, and then the debts of the Decedent.  In practice, a probate estate works similarly to a bankruptcy estate.  All of the assets are marshalled, potential creditors are noticed and file claims, expenses of administration are paid first, regular creditor claims paid next, and if anything is left over, the debtor receives the excess in a bankruptcy, and the beneficiaries of the estate receive what is left as their inheritance.

The Florida Probate Code places the expenses of administration and creditor claims into one of eight “classes.”  The creditors in each class are paid in full (or pro rata), before moving onto the next class, until the estate is exhausted or all debts have been paid.

733.707 Order of payment of expenses and obligations.—

(1) The personal representative shall pay the expenses of the administration and obligations of the decedent’s estate in the following order:

(a) Class 1.—Costs, expenses of administration, and compensation of personal representatives and their attorneys fees and attorneys fees awarded under s. 733.106(3).

(b) Class 2.—Reasonable funeral, interment, and grave marker expenses, whether paid by a guardian, the personal representative, or any other person, not to exceed the aggregate of $6,000.

(c) Class 3.—Debts and taxes with preference under federal law, claims pursuant to ss. 409.9101 and 414.28, and claims in favor of the state for unpaid court costs, fees, or fines.

(d) Class 4.—Reasonable and necessary medical and hospital expenses of the last 60 days of the last illness of the decedent, including compensation of persons attending the decedent.

(e) Class 5.—Family allowance.

(f) Class 6.—Arrearage from court-ordered child support.

(g) Class 7.—Debts acquired after death by the continuation of the decedent’s business, in accordance with s. 733.612(22), but only to the extent of the assets of that business.

(h) Class 8.—All other claims, including those founded on judgments or decrees rendered against the decedent during the decedent’s lifetime, and any excess over the sums allowed in paragraphs (b) and (d).

(2) After paying any preceding class, if the estate is insufficient to pay all of the next succeeding class, the creditors of the latter class shall be paid ratably in proportion to their respective claims.

Can An Estate File a Petition of Insolvency with the Probate Court?

Yes.  Filing and serving a Petition for Insolvency on all creditors and beneficiaries will alert all interested persons that beneficiaries are going to receive nothing, and the creditors will be taking a haircut.  Some probate courts will greatly ease up on the steps required to close an estate that is insolvent.  Some probate courts require a Petition for Insolvency if the estate is in fact insolvent and all creditors are not going to paid in full.  Here is an example of a Florida Petition for Insolvency.

Are Beneficiaries Liable for Estate Debts?

No, beneficiaries of an estate are not liable for the debts of the estate or of the Decedent.  One exception can apply, in that if the beneficiaries of the estate receive distributions from the estate, and it turns out that there are debts of the estate that still need to be paid, the beneficiaries can be forced to give back the inheritance already received, but no more than the amount received.  The Florida Probate Code sets forth the rule requiring improper distributions to be returned to the estate.

733.812 Improper distribution or payment; liability of distributee or payee.—

A distributee or a claimant who was paid improperly must return the assets or funds received, and the income from those assets or interest on the funds since distribution or payment, unless the distribution or payment cannot be questioned because of adjudication, estoppel, or limitations. If the distributee or claimant does not have the property, its value at the date of disposition, income thereon, and gain received by the distributee or claimant must be returned.

Are Children Liable for the Debts of Their Parents if the Estate is Insolvent?

No.  Adult children are not liable for the debts of their deceased parents, uncless, of course, the adult child agreed to be liable for such debts.  an example would be if the child signed a guarantee for a parent.

Jeffrey Skatoff is a Florida probate attorney.  To have Mr. Skatoff review your case free of charge, please go to his website.

Probate attorney Jeffrey Skatoff handles probate, trust, guardianship and inheritance litigation.

Jeffrey H. Skatoff, Esq.

Probate, Trust & Guardianship Litigation

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