July 18, 2022

Prioritizing Debts in a Probate Case

When a person passes away, they will invariably have some debt. This can take the form of a mortgage, a credit card bill, hospital expenses, cell phone bill, car insurance, etc.

A primary duty of any estate administration matter, whether probate or non-probate, is to itemize and categorize these debts. 

Once the decedent's debts have been itemized and categorized, the next step is to prioritize the debts. Yes not all debts are created equal. The following is the order of priority for creditors:

1. Administration expenses—for obligations secured by a mortgage, deed of trust, or other lien, only the administration expenses that are reasonably related to the administration of the secured property are given priority (Prob C §11420(a)(1));

2. Obligations secured by a mortgage, deed of trust, or other lien, including a judgment lien, to the extent that they can be paid out of the property subject to the lien—if the property is insufficient, the unsatisfied obligation is a general debt (Prob C §11420(a)(2));

3. Funeral expenses (Prob C §11420(a)(3));

4. Expenses of last illness (Prob C §11420(a)(4));

5. Family allowance (Prob C §11420(a)(5));

6. Wage claims (Prob C §11420(a)(6)); and

7. General debts (Prob C §11420(a)(7)).
A recent unpublished appellate decision addressed the issue of prioritizing debts:
"Appellant David Downs is serving as the administrator of the estate of Shawna Graham. The estate's primary asset is a piece of real property that Downs wants to sell for $365,000. The property is over-encumbered. Respondent Wells Fargo Bank, N.A. (Wells Fargo), is the beneficiary of a deed of trust on the property and is owed approximately $338,000; Matadors Community Credit Union (Matadors) has a security interest in a solar energy system installed on the property and is owed approximately $29,000; and decedent owed the Internal Revenue Service (IRS) approximately $40,000 in unpaid federal taxes. The costs of selling the property will be approximately $39,000, and Downs contends he and his attorney are entitled to approximately $66,500 in administrative expenses. If the property is sold for $365,000, there will not be enough money to pay all these debts."
The administrator then filed a petition to determine the order of payment if the property were to be sold. The administrator sought to have payment be made in the following order:
• $40,059 in federal taxes be placed in a trust account.

• $66,537 in costs of administration be placed in a trust account.

• $39,408 in costs of sale be paid directly to the parties to whom they are owed.

• $224,131 to Wells Fargo to partially pay off the mortgage.

• $0 to Matadors.

The trial court denied the requested order in its entirety. On appeal, the appellate court affirmed in part and reversed in part.

Estate of Graham, Placer County Superior Court, case # SPR0009820.