When someone passes away, their debts don’t disappear overnight. Credit card balances, medical bills, and mortgages all follow the estate into probate. But what happens if the estate runs out of money before debts are paid in California? In California, that situation is known as an insolvent estate, and it can change the outcome for creditors and beneficiaries in ways that surprise many families.
Let’s walk through what that really looks like under California probate law, and what it means for heirs left behind.
An insolvent estate happens when a person passes away, leaving more debts than assets; the estate simply doesn’t have enough property or money to pay all the creditors. In California, the law is clear: these debts belong to the estate, not the family. Beneficiaries aren’t personally responsible for what the estate can’t cover.
When an estate is insolvent, the personal representative (executor) must follow the state’s probate rules for insolvent estates in California. The court oversees the process to ensure creditors are paid in the proper order, as outlined in Probate Code Sections 11420–11422, and to determine whether any assets remain for heirs. Certain assets, like life insurance or retirement accounts with designated beneficiaries, may bypass probate and remain protected from creditor claims.
If an estate doesn’t have enough assets to cover all debts, some creditors may not get paid in full. The personal representative (executor) is responsible for gathering and, if necessary, liquidating estate assets (like selling real estate, vehicles, or personal property) to pay debts as much as possible.
When the estate’s money runs out, unsecured creditors are often the ones left unpaid. That usually means heirs don’t receive anything from the probate estate. However, certain non-probate assets, such as life insurance with a named beneficiary or retirement accounts, typically pass directly to the beneficiary and aren’t used to pay estate debts.
California probate law ensures that creditors are paid in a specific order: administrative costs first, then secured debts, funeral and medical expenses, taxes, and finally general unsecured debts. Following this order helps the process stay fair and predictable, even when the estate can’t cover everything.
California probate law establishes a clear order for paying debts when an estate doesn’t have enough assets to cover everything. Following this order ensures creditors are treated fairly and the personal representative stays within the law. Here’s the general priority:
Creditors in the last category may not receive full payment (or any payment) if the estate runs out of money. This order of payment is outlined in California Probate Code Sections 11420–11422, and following it is critical to protect both the estate and the personal representative from liability.
When a probate estate doesn’t have enough assets to cover all debts, beneficiaries usually don’t receive anything from the probate estate itself. Creditors are paid first, and in many insolvent estates, that leaves little or nothing for heirs.
That said, not everything the decedent owned goes through probate. Assets like life insurance with a named beneficiary, retirement accounts, or property held in joint tenancy generally pass directly to the beneficiary and are protected from creditor claims. These non-probate assets can provide some relief to families, even when the probate estate is unable to pay its debts.
So, while an insolvent estate may limit what beneficiaries inherit from probate assets, there are often ways for families to receive certain assets outside of the probate process.
Even when an estate is insolvent, the personal representative has ways to manage the process effectively:
The best strategy depends on the estate’s mix of assets, the total debt, and the types and number of creditors involved.
Handling an insolvent estate involves more than paying bills and requires following strict California probate rules. Mistakes, like paying creditors in the wrong order, can expose the personal representative to personal liability. A probate attorney can help in several ways:
For families already dealing with grief, professional guidance helps the process go more smoothly and reduces the risk of costly errors.
Finding out that a loved one’s estate can’t cover all debts is stressful. Creditors call, family members worry about losing everything, and the probate process feels overwhelming. But in California, families aren’t personally responsible for a relative’s debts—the estate is. The real challenge is making sure everything is handled properly so creditors are paid in the right order and no mistakes jeopardize the process.
At Ferguson Law Group, we’ve helped many families through insolvent estate cases. If you’re facing questions about unpaid debts, creditor claims, or probate in California, we’re here to walk you through it. Schedule a consultation today, and let’s find the best way forward for your family.
If an estate is insolvent, debts are paid in a legally required order during probate, and some creditors may not be fully repaid.
California law prioritizes funeral expenses, estate administration costs, and taxes before paying other creditors.
No, if debts and expenses use up all estate assets, beneficiaries do not receive an inheritance.
