What is an “Insolvent Estate”?
Updated: Dec 17, 2018
When an estate is admitted to probate, it is classified as either solvent or insolvent. Solvent means that there are more assets in the estate than there are debts. Once the debts are paid, the remaining assets are distributed in accordance with the Will (or in accordance with state law if there is no Will).
However, if there are more debts than there are assets, then the estate is considered insolvent. The assets are liquidated and used to pay creditors in order of preference as outlined in Indiana code:
Costs and expenses of administration, such as Attorney’s Fees, Personal Representative’s fees, and court costs.
Reasonable funeral expenses, expenses of a tombstone, and expenses incurred in the disposition of the body.
Allowances for surviving spouse and minor children.
All debts and taxes having preference under the laws of the United States.
Reasonable and necessary medical expenses of the last sickness of the decedent.
All debts and taxes having preference under the laws of Indiana.
All other claims allowed through the court.
Any unpaid creditors will have to write off the debt. The heirs of the estate will receive nothing as there are no remaining funds to be distributed.
Note that you are not personally liable for the debts of the estate. Simply tell creditors that the estate is insolvent and there is no money to pay the debts.
Of course, it is preferable to die with a solvent estate so you have a legacy to leave for your family and loved ones. Carefully managing your assets while you are alive will help you accomplish this.