Paying Creditors & Navigating Exceptions
What happens if Uncle Joe leaves you a house in a trust or a will:
- But the mortgage owed on the house is for more than the house is worth?
- There are additional assets in the estate that do have value? Is there a way to legitimately cut off creditors of an estate?
- Or what if you are the successor trustee of a trust that has several properties. Some of them have valuable equity and some are underwater. You want to dump the underwater properties and distribute the valuable properties to the trust beneficiaries. How do you do that without running the risk of being liable to the lenders on the underwater properties?
As a general rule the administrator or executor of an estate or trustee of a trust must pay off legitimate creditors. A probate lawyer can help you navigate the exceptions.
Three Exceptions To Paying Off Legitimate Creditors:
- In general, under Nevada law, the creditors will be in danger of being cut-off if the administrator or executor or trustee gives actual notice to known creditor and publishes notice of a deadline to unknown creditors in a probate proceeding. The creditors then have 60 to 90 days to submit claims. In the case of a will see, NRS 145.060, NRS 147.040; and NRS 155.020. In the case of a trust see N.R.S. 164.025. If the creditor does not submit a claim within that time period, the creditor loses the claim. A creditor may decide it is not worth the expense and hassle to submit a claim, or a creditor may not be able to organize its claim and supporting documents within the specified period of time*. Here in Las Vegas we pay $70 to Nevada Legal News to publish required notices to creditors.
- These days it is very common for real estate to have a bigger mortgage than it is worth. If such a home is in the estate, there are three options:
- The logical option would be for the estate personal representative to sign a quitclaim deed to the mortgage holder and have the mortgage holder promise to forgive any deficiency judgment. For a variety or reasons the mortgage holder hardly ever accepts this option.
- The mortgage holder likely will request that the estate do a short sale. This imposes a lot of work on the estate administrator or executor and may delay the closing of the estate. However, if the mortgage holder can act rapidly and the market for selling the home is favorable, and particularly, if the mortgage holder will not only promise to give up a claim for deficiency, but will in addition compensate the estate for this extra work, this is a logical option. Due to 2011 changes in the law, more and more mortgage holders are willing to not only let a short seller off the hook for the deficiency, but they are often willing to give the short seller thousands of dollars to cooperate in a short sale and maintain the property in excellent condition until the sale closes.
- However, typically, the mortgage holder cannot act quickly and will not promise to forgive the deficiency. (Sometimes you can't get the attention of the mortgage holder until several payments have been missed.) In this case we mail the 60 or 90 day Notice to Creditors to the address where the mortgage payments are sent. Almost invariably the mortgage fails to file a timely Creditor's Claim with the court. We then obtain a Probate Court Order that the mortgage holder's claim was not timely filed and that the estate, its personal representatives, and its lawyers, have no liability for any deficiency and the estate walks away from the property.
- For estates under $100,000.00, NRS 146.070(1) allows the court discretion to deny creditors if necessary so that the estate can provide support to the surviving spouse and/or minor children. Typically, the court automatically favors the surviving spouse or minor children even without a showing of need. This is discussed in more detail at How the Surviving Spouse or Minor Children May be Able to Cut-off Creditors' Claims.
*The line between playing cute games to try and cut creditors off (which courts don't like) and using statutory time periods to foreclose claims legitimately can be a bit tricky. There is just room here to discuss two examples. On the one hand, courts expect funeral homes to be paid and expect administrators, executors, or trustees to make inquiry to make sure the funeral bill gets paid. On the other hand, if an executor gives an underwater house back to the mortgage company, the mortgage company will only have the statutory period to try and make and justify its claim for a deficiency judgment. Especially in cases in which an estate has both negative and positive assets it can be essential to hire an experienced Nevada probate attorney to avoid exposing the estate administrator or executor to liability.