Creditor's Claims in an Independent Administration

I know the topic alone gets your blood pumping. Can't contain your excitement? Read on.

In an independent administration, (IE, someone dies without a will, everybody agrees on how things will get split up, and the court appoints an independent administrator to settle things up) the independent administrator has to deal with creditors.

Example: Mother died without a will. She had $5k of credit card debt, $3k of debt at Sears, owed on her car and still had not paid off her mortgage on the condo she bought in Corpus. You were appointed independent administrator. What to do?

As an independent administrator, within 30 days after you have qualified (taken the oath and given any required bond), you must publish a notice to creditors in a local newspaper advising all creditors of your appointment. Within two months after your qualification, you must mail a registered or certified letter, return receipt requested, to each secured creditor of the estate. A secured creditor is one who holds a claim secured by a deed of trust, a mortgage, or some other lien upon property. You must file proof of the above two notices with the clerk’s office.

So what happens when the creditor's call you back?

Turns out, the creditors have options. If they are secured, then they can either proceed under the probate code, or not. If you go the probate code route, Sec. 306 provides that you can elect to take the collateral and forego any other claim against the estate, OR be treated as a matured secured debt, to be paid within due course of administration. Easy right? Not so fast.

Sec 146(b) of the Texas Probate Code provides another wrinkle: (b) Secured Claims for Money.  Within six months after the date letters are granted or within four months after the date notice is received under Section 295, whichever is later, a creditor with a claim for money secured by real or personal property of the estate must give notice to the independent executor of the creditor's election to have the creditor's claim approved as a matured secured claim to be paid in due course of administration.  If the election is not made, the claim is a preferred debt and lien against the specific property securing the indebtedness and shall be paid according to the terms of the contract that secured the lien, and the claim may not be asserted against other assets of the estate. 

So, if you don't comply with the time limit, you are stuck with the preferred debt and lien option. This means you cannot get a deficiency judgment. Further, the Independent Administrator can just say "No" or do nothing, rejecting your claim. If this happens, you have to file suit. What a pain.

Option B turns out to be good ole' fashioned foreclosure. If your secured asset included a power of sale, you can still use nonjudicial foreclosure, assuming you properly notice the independent administrator and conduct it appropriately, and still retain the ability to file suit for any remaining deficiency.

Complicated enough? Rep. Will Hartnett attempted to get a bill pushed through last legislative session to simplify things a little, but it didn't quite make it. A good analysis of the changes can be found here.

What does any of this mean?

For Independent Administrators:

1. You don't have a choice in not paying your creditors. If you want them to maybe go away, you have to use a dependent administration, or just hope they never call you back.


2. If creditors do call you back, sometimes they will settle on a lesser amount to save the headache of pursuing other remedies.


3. If you want to reject a creditor's timely claim, know that they can, and often will sue you.

 

For Creditors:

1. Are you secured? If so, you have options. Make sure you preserve your right to a deficiency by either foreclosing, or timely becoming a secured, approved claim under the probate code.


2. Don't forget to send notice, if you foreclose or pursue the probate code remedies.

 

At the end of the day, creditor's claims can be a headache, for both the estate and the creditor, but they do not have to be.