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How Is Upside-Down Property Handled in Probate?

How Is Upside-Down Property Handled in Probate?

A house model and piles of coins

When dealing with upside-down real property in probate, an Executor has a fiduciary responsibility to pay off debts of the United States (tax debts) first. This is an arduous task, considering that the debts are more than the estate value. Once tax debts are paid off, the rest of the debts are divided into the following categories:

  • Administration Expenses: This category consists of reasonable compensation of Executors, attorney fees, and out-of-pocket expenses like bank fees and recorder charges required to settle the estate.
  • Debts Secured by Liens like Deed of Trust or Mortgage: This category comprises unpaid mortgage on real property as well as any other collateral-secured debt. This category is, however, restricted to the asset that serves as collateral. If the value of that asset is less than the secured debt, then the excess debt will be classified as “General Debts.”
  • Funeral Expenses: This class includes reasonable grave maker and burial costs.
  • Last Illness Expenses: This category includes reasonable and compulsory medical and hospital costs of the decedent’s last illness, often the last 60 days. It also includes compensation for the decedent’s care providers.
  • Family Allowance: Specific individuals, including minor children or parents of the decedent, are entitled to a specific amount from the estate to take care of their expenses. Family allowances are contingent on court approval, and the amount varies from individual to individual, depending on circumstances.
  • General Debts: This category includes all other debts, including those based on rulings made against the decedent during his or her lifetime. Any excess above the amount allowed in administration expenses, funeral expenses, and last illness expenses is also part of general debts.

The Executor is obligated to identify debts that fall into each of the above-mentioned categories and then settle debts of each category according to the order above. Debts in the same category can be paid off in any particular order, but all the debts in the previous category must be cleared before moving to the next category. Before paying family allowance, for instance, the Executor must pay all the last illness expenses.

If the property value isn’t enough to clear all the debts of any category in full, the Executor must pay a proportional share of each debt of that category. A probate lawyer can offer a full-service representation that also includes answering frequently asked probate questions. Lawyers can help in guiding the Executor on the best way to handle an upside-down property.

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