Debts owed by someone who has passed away
If you are owed money by someone who has died, you can usually recover the debt (together with any interest payable) from the person’s estate. Creditors usually have 6 years from when the debt was first incurred within which to issue proceedings to recover a debt.
When someone dies, it is the duty of their executor (if they leave a will) or their administrator (if they die without a will) to gather in all of their assets. The executor or administrator must then use those assets to pay the deceased’s debts. Only after all the debts are paid can anything remaining be divided among the beneficiaries in accordance with the terms of the will.
If someone who owes you money has passed away, you should give notice of the details of the debt that you are owed to the executor or administrator of the estate as soon as possible. You should provide the executor or administrator with evidence of the existence of the debt and details of any payments that were made by the deceased. If you had a written contract with the deceased, you should provide the executor with a copy of the contract and evidence that you performed your obligations under it.
If you do not know who the executor or administrator is, you could try enquiring with the deceased’s family. If you are unable to contact the family or they are not willing to speak with you, you can apply to the High Court for a copy of the letters of administration or probate, which will name the executor or administrator of the estate.
If the executor disputes the validity of the debt, you may have to bring a claim in court to have the debt recognised and enforced.
If there are insufficient assets in the estate to pay all debts, then each unsecured creditor will usually receive a share of the available assets proportionate to the amount of the debt that is owed to them.
It is not usually possible to enforce a debt against the deceased’s family members unless they have personally guaranteed the payment of the debt.
Creditors’ rights if estate has already been distributed
It is the duty of the executor to gather in the estate’s assets, pay the estate’s debts, and distribute the remainder to the beneficiaries.
One of the biggest risks that an executor faces is a creditor who turns up looking for payment of a legitimate debt after the estate has been fully distributed. In some instances, an executor can be personally liable to reimburse the creditor.
The Trusts Act 2019 sets out a procedure that an executor can follow to limit their liability to creditors by giving notice to potential creditors and other claimants. The Trusts Act states that an executor is not liable in relation to the distribution of estate property if:
- The executor has first given formal notice to potential creditors and other claimants;
- The distribution is made after the notice deadline; and
- The executor was not aware of the person’s claim at the time of the distribution.
To be valid, the formal notice to potential creditors and other claimants must:
- be given in a manner likely to come to their attention;
- identify the estate affected;
- state that any creditor or other claimant who asserts a right or an interest relating to the estate property must give notice of their claim to the executor before a date specified in the notice that is at least 30 days after the date the notice is given (the notice deadline);
- set out the physical and email addresses to which a notice of claim and details of a claim may be sent; and
- state that the proposed distribution may be made without regard to any claim of which the trustee does not have notice before the notice deadline.
It was previously the case that an executor could simply publish the notice in a newspaper in the locality where potential creditors were likely to reside. This is unlikely to be sufficient under the current law, which now requires that the notice must be “given in a manner likely to come to their attention”. As few people in New Zealand still read newspapers (let alone the legal notices page), it can hardly be said that a notice published in this way would be likely to come to a creditor’s attention. Yet, this seems to be the approach that a lot of law firms around New Zealand are still taking, opening up their client executors (and possibly the firms) to potentially significant liability in the event that a creditor were to come out of the woodwork some time after the notice had been issued.
An executor can apply to the court for directions under section 133 regarding the type of notice that is appropriate. While such an application would be expensive, if there is a material risk of a sizable creditor showing up some way down the road (for example, where the deceased person was trading on their own account immediately prior to their death), it would be prudent for the executor to employ this procedure and avoid the risk of a potentially significant liability.
One solution, which avoids the need for a court application, is for the executor to obtain an indemnity from beneficiaries, requiring the beneficiaries to reimburse the executors if any new claims against the estate arise after the distributions have been made. However, this indemnity only protects the executors if the beneficiaries are able to pay the claimed amount. Thus, if the beneficiaries dispose of any inheritance before the executor requires the indemnity, it may prove to be of little use.
If you are a creditor of an estate that has already been distributed to the beneficiaries, you should make enquiries as to whether the above process has been followed. If not, you may be able to recover the debt from the executor personally.
Debts incurred after death
If an executor enters into a contract – for example, with a funeral home or with law firm engaged to help with the administration of the estate – the executor is personally liable to meet the costs that are incurred as a result, and can claim a reimbursement from the estate only if the costs are reasonably incurred.
An executor is not able to claim that they were only acting in their capacity as “an executor” and avoid the contract – if the executor entered into the contract, it is the executor who is liable at first instance. This is the case unless the agreement between the executor and the third party says otherwise. An executor should therefore take great care to ensure that there are sufficient assets in the estate before they start incurring costs, as they are likely to be liable to meet the cost personally if there is not enough money in the estate to pay the bill.