Retzner: Creditors must file claims or risk losing them forever

Keywords Debt / Estate
retzner-rodney-mug.jpg Retzner

By Rodney Retzner

Creditors, and legal counsel representing them, need to be well-versed in the claims procedure of estate when a debtor dies. Creditors should also keep track of debtors and guarantors, probably on more than an annual basis. Without knowledge of the rules for filing claims in probate estate, or without even knowing that a debtor or guarantor is deceased, the ability to collect on a debt or guaranty can be lost with no ability to file or revive a claim for payment.

Debt comes in many varieties, most notably being debt owed directly by an individual debtor. Debt can also arise under a guaranty of debt by a third party; the later being mostly in the form of lending to a business or other entity which a guarantor has guaranteed with his or her personal assets. Whenever an attorney represents a creditor under these circumstances, the issue of the potential need to eventually file a claim at the death of the debtor or guarantor needs to be considered. A plan of regular contact with either the debtor or guarantor needs to be implemented, as does a plan for a regular review of assets that can be used to satisfy any such claim if the need arises. In addition, even though a claim may be filed in a deceased’s estate, the more recent trend of transferring property to a revocable trust can cause additional difficulties for creditors after the death of a debtor or guarantor.

After death of a debtor or guarantor, the rules for filing claims in an estate are extremely strict. Claims must be filed within three months of the date of creditor receiving notice of the opening of an estate administration. Additionally, claims must be filed, if at all, within nine months of the date of death, regardless of whether notice was received. These statutes and the timing involved act as a “statute of repose” as contrasted with a “statute of limitation”; the main difference being that a statute of repose treats the claim as though it never existed whereas a statute of limitations can be tolled, allowing additional time to file the claim. In fact, the statute and caselaw in Indiana is so in favor of allowing an executor to wrap up the affairs of the deceased that if a claim does not get filed in time, there is no protection from an executor who makes such a statement as “We will make sure you get paid” and “There is no need to file a claim,” and then reneges on those statements later on.

Filing claims becomes even more involved if all the assets of a deceased are placed into a revocable trust prior to death or pass by joint ownership, beneficiary designation or some other method, resulting in there being no need to open an estate administration. In those cases, the creditor may have to commence the estate administration, file its claim, and then plead those non-probate assets into the probate estate for the payment of the claim. All of these procedures are triggered off of the same nine-months-after-death period of time and all, again, are treated in the same manner as a statute of repose. In short, it is extremely important for a creditor to monitor both the debtor and the guarantor to ensure that they are well aware when a debtor or guarantor of debt passes and of all of the assets available to satisfy that debt or guaranty when the deceased passes away.

Claims can be filed as actual claims or contingent claims. An actual claim would be when an amount of money is actually due and should be paid. A contingent claim typically arises when a debt is being properly serviced but the claim needs to be filed to protect a guaranty given by a now-deceased guarantor. The debt on such a guaranty may not be accelerated or due and owning but could be in the event of default. In such cases, the claim would be contingent but still needs to be filed to protect the guaranty and force a replacement guaranty or refinance of the debt.

In both cases of an actual claim or contingent claim, once filed, the executor has 15 days after the closing of the three-month notice period or 15 days after a claim is filed, to allow or disallow the claim filed. If the claim is allowed, the estate and the creditor can negotiate a release of the claim through payment of the debt, a replacement guaranty or other mechanism that makes the creditor comfortable enough to release the claim. If the claim is disallowed, however, it falls back to the claimant or the executor to set the claim for trial. Once set for trial, the claim proceeds as any standard commercial litigation case. Once a claim is allowed, however, the executor could renege and disallow the claim. Notice of such reversal should be made to the creditor but may not be. If a claim is disallowed, initially or after allowance, and that claim is not set for trial, the claim could potentially be dismissed for lack of prosecution. Therefore, even after a claim is filed, it is important that the creditor prosecute the debt, keep tabs on what is done with respect to the claim and monitor the estate proceedings. Once a claim is satisfied, either by payment of debt, replacement guaranty or refinancing, etc., it then falls back to the creditor to timely release the claim.

If you represent creditors, you should be advising those clients on their rights and the strict limitations and timing of the claims procedures. Debtors can most definitely use these rules and time limitations to their advantage and can, potentially, erase debt owed by a deceased. Creditors should monitor their debt portfolios and keep track of debtors and guarantors. Not doing so can result in a significant loss — a claim that is lost forever.•

Rodney Retzner is a partner at Krieg DeVault LLP and chair of the firm’s estate planning and administration practice group. The opinions expressed are those of the author.

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