Your Debtor Has Died, Now What? A Creditor's Guide to Claiming Against Debtors’ Estate
Authored by Pravin Rakawan
Introduction
A debtor's death does not cancel the debt. It plainly becomes a claim against their estate instead. But a creditor who simply waits to be paid can easily be left out for reasons such as: - (a) estates get wound up, (b) money gets distributed, and (c) a claim is time barred. This article sets out who a creditor should claim against, how secured and unsecured debts are treated differently, what happens if the estate is insolvent and cannot pay everyone in full, and the practical steps a creditor can take to protect their position.
The Debt Survives Against the Estate
Under Section 8(1) of the Civil Law Act 1956 (“CLA 1956”), a debt does not die with the debtor. It survives and becomes a claim against their estate, to be pursued against whoever is appointed to administer it, could be the Executor, if there is a will, or the Administrator, if there is not.
The law also protects creditors from being cut out by the will itself. Section 67(1) of the Probate and Administration Act 1959 (“PAA 1959”) says the deceased's property is there to pay their debts, and any part of the will that tries to get around this is void as against creditors. A testator cannot simply will away everything and leave creditors with nothing.
Who Do You Actually Claim Against?
Not the family. Not the beneficiaries. A creditor claims against the Personal Representative (the Executor or Administrator). Until a Grant of Probate or Letters of Administration is obtained, no one yet has legal authority over the estate, so a claim generally must wait for that grant to be obtained.
For larger estates, it is common practice for the Personal Representative to advertise for claims, usually in the Government Gazette and a newspaper before distributing anything. Creditors should be alert of these notices and respond before the stated deadline, or risk being left out of the distribution.
What if the family is dragging its feet and no one applies for a grant at all? Section 9 of the PAA 1959 lets a creditor force the issue, by serving a citation requiring the person entitled to apply for a grant to either do so or formally give up that right. This stops a claim from sitting in limbo indefinitely.
Secured Debts vs. Unsecured Debts
If you hold a security such as, a bank with a charge over the deceased's house, you are in a much stronger position. Section 70 of the PAA 1959 confirms that a charge is paid primarily out of the property it is secured against. This means a secured creditor can generally enforce that security (for instance, a sale of the property) without waiting for, or queuing behind, the rest of the estate's creditors.
An unsecured creditor does not have that shortcut. They must lodge their claim with the Personal Representative and wait their turn, behind funeral costs, administration expenses, and any secured creditors paid out of their own collateral.
What If the Estate is Insolvent?
Where the estate is insolvent, it is handled in the same way as bankruptcy. Section 69(1) of the PAA 1959 and Sections 4(1) and 4(2) of the CLA 1956 apply bankruptcy-style rules: preferential debts (such as employees' unpaid wages) are paid first, and the remaining unsecured creditors then share what is left pari passu (proportionately), not on a first-come-first-served basis.
It is important to note that, a Personal Representative who pays one creditor in full after realising the estate cannot cover everyone may have to unwind that payment later. Creditors should not expect to simply be paid faster by asking first.
Do Not Forget the Limitation Clock
Death does not pause the clock on your claim. Under Section 6(1)(a) of the Limitation Act 1953, a simple contract debt must usually be sued on within six (6) years of when it fell due. If you were already sitting on a stale debt before the debtor passes, it does not get a fresh six years just because they have passed away. Therefore, it is important to check how much time you have left for the debt recovery before deciding how to proceed.
How to Protect Your Claim
Lodge a caveat. Section 33 of the PAA 1959 provides creditors avenue to stop a Grant of Probate or Letters of Administration being issued without you being notified first, giving you a chance to raise your claim before the estate moves forward.
Use the citation procedure if the family is inactive. Section 9 of the PAA 1959 lets you force someone to either apply for a grant or step aside, rather than letting the estate sit unadministered indefinitely.
Respond quickly to any advertisement for claims. Missing the deadline can mean the estate is distributed without setting anything aside for you.
Keep your paperwork in order. Contracts, statements of account, and demand letters all help once there is a Personal Representative in place to deal with.
Check your limitation period early. Do not assume you have a fresh six years simply because the debtor has died.
Take security where you can. A secured creditor is in a far stronger position than an unsecured one, worth considering upfront, before a dispute or death ever arises.
Conclusion
In conclusion, a debtor's death changes who you pursue for the debt, not whether you can be paid. The debt survives against the estate, secured creditors are generally paid first out of their own collateral, and everyone else queues behind funeral and administration costs, in full if the estate can afford it, or proportionately if it cannot. A creditor who waits passively risks being overtaken by distribution or caught by limitation period. One who acts early such as lodging a caveat, watching for claims notices, and using the citation procedure where needed stands a far better chance of being paid. Therefore, consult a lawyer in order to know where your debt stands as against the debtor’s estates for potential claims.
Bibliography
Probate and Administration Act 1959, Sections 9, 67, 69, 70 and First Schedule
Civil Law Act 1956, Sections 4 and 8
Limitation Act 1953, Sections 6(1)(a)
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