Dealing with creditors in Texas after someone dies
The first step is to notify creditors of your loved one’s death in a local newspaper.
Lenders who issued secured credit, like a mortgage or car payment, will need to be notified directly.
In some cases, you may want to directly contact unsecured creditors as well.
You must follow Texas laws outlining the order in which creditors are paid. Federal taxes and funeral expenses are at the top of the list.
In rare cases, creditors can make a claim on non-probate assets, or the belongings that are passed to heirs outside of the probate process. But in general, creditors cannot touch non-probate assets.
Settling your loved one’s debts is one of the many responsibilities of the estate’s executor or administrator. The specifics of this process differ from state to state, so it is important to familiarize yourself with what the Texas probate code has to say about creditors.
Texas law outlines the order in which creditors will be paid—and if the estate runs out of money before all bills are paid, the last creditors on the list do not get their money back. For this reason, it is important to follow state law in settling debts. If you pay a less-important creditor with estate funds, to the extent that higher-priority creditors are not able to be paid, the family may then be responsible for paying those debts.
As in other states, the process of dealing with creditors in Texas begins with you notifying them that your loved one has died, so they can begin filing any claims they have against the estate.
Posting a notice to creditors
In Texas, an executor or administrator of an estate has 30 days after their appointment by the court to publish a notice to creditors in a county newspaper.
The notice must include: the date you were appointed executor or administrator, the address to which claims must be presented, and instructions for whom to address the claim (the executor, attorney, or personal representative).
Make sure to keep a copy of the newspaper publication to show to the court. You may also need to obtain an affidavit from the publisher of the newspaper.
Notifying secured creditors
There is an additional process for secured creditors. If your loved one had a mortgage or a car loan, for instance, those are forms of secured credit. Even personal loans—if they are backed by collateral that can be seized for non-payment—are considered secured credit.
Secured creditors must be informed of your loved one’s death within 60 days of the executor’s or administrator’s appointment by mailing a registered, official letter with a return receipt requested.
Secured creditors must file their claim within six months of the executor’s appointment, or four months after their receipt of the notice from the executor.
This notification should include the same information as the notice to creditors printed in the newspaper, and a copy of the letter and return receipt should be filed with the court as proof of notification.
Secured creditors generally have six months from the executor’s appointment, or four months after their receipt of the notice from the executor, to file their claim against the estate. After this time limit, any claim submitted will be barred, meaning that the creditor will be unable to sue the estate.
Notifying unsecured creditors
While Texas law does not mandate the notification of unsecured creditors—or, those who issued loans without requiring collateral—it may be advisable to post a notice to any known ones anyway.
Unsecured creditors may include credit card companies and some personal loans. Any time before the estate is closed, the executor may notify unsecured creditors with the same information and in the same way as a secured creditor.
The letter should also state that the creditor has four months to bring forth any claims against the estate. If creditors miss the deadline to submit a claim, they may miss their chance to secure the debt owed to them.
A Texas estate does not necessarily pay out all claims presented to it. There is an order of priority for debts to creditors if the estate’s assets cannot cover all valid claims:
Funeral expenses and/or final illness expenses up to $15,000
Estate administration expenses
Secured debts to be paid for by the sale of estate assets
Child support payments and interest
Texas state taxes, penalties, or interest
Incarceration costs, if applicable
Claims for repayment of medical assistance payments made by the state of Texas (MERP)
All other claims
Texas residents who received long-term Medicaid coverage will be subject to the Medicaid Estate Recovery Program (MERP). The MERP does not have to be a worrisome prospect, though.
MERP will not place a lien on the estate, and it is not allowed to recover assets exceeding the value of the estate. Furthermore, the MERP is not applicable when the recoverable Medicaid debt is $3,000 or less, or if the value of the estate is $10,000 or less.
The MERP will only be able to claim assets from the estate to repay Medicaid debts after all of the previous categories have been dealt with. If the estate cannot cover the full Medicaid debt, you can apply for a hardship waiver.
You may be wondering if creditors can claim your loved one’s non-probate assets, such as life insurance, IRAs, and qualified plan assets. These assets pass on to the beneficiaries without going through probate.
In general, creditors can’t touch these non-probate assets, unless they are paid to the estate. However, under Texas law, it is possible for non-probate assets such as multi-party bank accounts, and joint tenancy with rights of survivorship, to be subject to creditor’s claims if the estate’s other assets are insufficient.
If the estate’s assets are not sufficient to pay off all the debts owed to creditors, you may worry that your personal property, or another family member's property, will need to be used to pay creditors.
Rest assured that this will not happen. When the estate doesn’t have enough to pay off all its debts, including those owed to creditors, the assets will be used to settle claims in the above order of priority, and once the assets are all used up, the estate is declared insolvent. When an estate is declared insolvent, there is nothing that creditors can do.
However, the executor has to be extremely careful not to reject a creditor’s valid claim, even if the estate is going to be insolvent. Executors or administrators can be personally liable for paying any expenses accrued by the creditor(s) in their attempt to sue the estate after their valid claim is rejected. To avoid this scenario, it’s important to respond to creditors’ claims with the help of a lawyer.
Dealing with creditors can be one of the more confusing parts of your role as executor. While the Texas probate law is no less complicated than other states, it’s still far from intuitive if you don’t have any prior experience as an executor or administrator of an estate. With the help of a seasoned probate or estate attorney, you can navigate the process with more ease and manage your loved one’s debts and assets properly ●
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