The New Jersey legislature updated the state’s Probate Code effective Feb. 27, 2005. Prior to this, creditors had six months during the probate process to make a claim for any debts the deceased owed them. The clock now begins ticking on the date the deceased dies. Creditors have nine months from the date of death to make a claim for payment.
Under the old law, the executor of an estate had to apply to the surrogate’s court for an “Order Limiting Creditors” after submitting a will for probate. The executor had to issue the order to the deceased’s creditors, then wait six months for the creditors to make claims. Since February 2005, giving notice is no longer required. The statute of limitations runs for an additional three months, but creditors are responsible for making claims for their money without receiving the order notifying them of the time limit. If the executor does not receive a claim during the nine months after death, he can disburse the money in the estate to its beneficiaries without any liability to the creditor who failed to make one.
Payment of Claims
Just because a creditor makes a claim, it does not necessarily mean that the company will get all or even any of its money. In many cases, the executor will negotiate the debt downward. An executor can also deny a claim if he doesn’t think it’s valid. The creditor then has three additional months to file a complaint with the court to override the executor’s decision. If an estate doesn’t have sufficient money to pay all claims presented, some have priority over others. The executor pays funeral expenses first, then the costs of bringing the estate to closure, then any taxes the estate or the deceased owed. The executor next must pay debts secured by collateral, such as auto loans or mortgages. Medical bills associated with the testator’s death come next, then the executor will pay any creditors who had judgments against the deceased for the money owed. Unsecured creditors receive their money last.
Any of the deceased’s assets that do not pass through the probate process are exempt from creditor claims. For example, life insurance policies and retirement funds usually pass directly to a beneficiary, not to the deceased’s estate. If assets are part of the estate, they’re vulnerable to creditor claims. If they pass directly to a beneficiary, a creditor may not make a claim against the assets.
If you die without leaving a will in New Jersey, the state will oversee settlement of your estate. Your property passes to your heirs via New Jersey’s order of intestate succession. Under the new legislation adopted in 2005, your spouse generally stands to inherit first. This doesn’t preclude a creditor making claims against your assets and estate, however. If you have significant debts and you’re concerned that they might whittle away any inheritance you want to leave to your loved ones, protect your assets by moving them into non-probate accounts, such as payable-on-death accounts, investment accounts and insurance policies that will move directly to your named beneficiary after your death.
Beverly Bird has been writing professionally for over 30 years. She is also a paralegal, specializing in areas of personal finance, bankruptcy and estate law. She writes as the tax expert for The Balance.