One of my post popular blogs was about insolvent (i.e. “BANKRUPT”) probate estates. Here are my notes from Tuesday’s NBI seminar on the topic. If you want to discuss short sales, upside down houses, forced mortgage reductions, dealing with reverse mortgages after death or just dealing with estates that have a lot of creditors Contact Me! -John
An estate is insolvent if, at fair valuations, the sum of the estate’s debts is greater than all of the estate’s assets (Cal Civil 3439.02).
(a) Debts shall be paid in the following order of priority among classes of debts, except that debts owed to the United States or to this state that have preference under the laws of the United States or of this state shall be given the preference required by such laws:
(1) Expenses of administration. With respect to obligations secured by mortgage, deed of trust, or other lien, including, but not limited to, a judgment lien, only those expenses of administration incurred that are reasonably related to the administration of that property by which obligations are secured shall be given priority over these obligations.
(2) Obligations secured by a mortgage, deed of trust, or other lien, including, but not limited to, a judgment lien, in the order of their priority, so far as they may be paid out of the proceeds of the property subject to the lien. If the proceeds are insufficient, the part of the obligation remaining unsatisfied shall be classed with general debts.
(3) Funeral expenses.
(4) Expenses of last illness.
(5) Family allowance.
(6) Wage claims.
(7) General debts, including judgments not secured by a lien and all other debts not included in a prior class.
(b) Except as otherwise provided by statute, the debts of each class are without preference or priority one over another. No debt of any class may be paid until all those of prior classes are paid in full. If property in the estate is insufficient to pay all debts of any class in full, each debt in that class shall be paid a proportionate share.
California Probate Code Section 10361 (a) If encumbered property is sold, the purchase money shall be applied in the following order:
(1) Expenses of administration which are reasonably related to the
administration of the property sold as provided in paragraph (1) of
subdivision (a) of Section 11420.
(2) The payment of the expenses of the sale.
(3) The payment and satisfaction of the amount secured by the lien
on the property sold if payment and satisfaction of the lien is
required under the terms of the sale.
(4) Application in the course of administration.
(b) The application of the purchase money, after the payment of
those expenses set forth in paragraphs (1) and (2) of subdivision
(a), to the payment and satisfaction of the amount secured by the
lien on the property sold shall be made without delay; and, subject
to Section 10362, the property sold remains subject to the lien until
the purchase money has been actually so applied.
PRACTICE POINTER: When I see a case is possibly heading toward insolvency I often recommend waiting until the final petition to deal with all creditors. That way you can clearly lay out in one place who is entitled to what. Additionally, that would be noticed for everybody to show up in Court if they disagree.