The short answer is no, the IRS code does not allow an estate to declare bankruptcy. But that does not mean there are not real life situations where an estate may leave more debt that it has assets. As I had posted about before, over half of Michael Jacksons one trillion dollar plus estate was subsumed by debt. So what can you do if you are stuck being the Personal Representative of an Estate in Florida with more liabilities (or debts) than assets?
- Not all States are the same so make sure to always consult an experienced probate attorney in the relevant jurisdiction – for example in Iowa their probate courts can declare an estate insolvent which then goes through something similar to a bankruptcy auditing.
- Liquidation is available under the IRS code which means you can use it in any jurisdiction including Florida. Florida law requires that all assets be sold and then creditors be paid off according to priority set in statute. Court costs and administration of estate goes first followed by funeral expenses and taxes BEFORE creditors get a stab at the estate.
- Low priority creditors will simply not get paid when the money runs out- pretty much like a bankruptcy case.
- Unsecured creditors typically write these off as business losses, so dont feel to bad for them either.
- Secured creditors – those are the guys whose debts are secured by collateral (i.e. your house, your car, maybe your knee caps) they are allowed to foreclose and reposesses the collateral if there is not enough money in the estate to pay the debt so they could force the sale of a prized family heirloom if you cant afford to foot the bill for it!
- Insolvency can be petitioned for in Florida when liabilities outweigh assets. What money is left is divided according to priority amongst the creditors.
- So what happens to the beneficiaries right? Well they are not going to inherit anything if the Estate does not have enough money, after all the creditors need to get what is theirs before you get a windfall.
Want to learn more about probate, guardianship and what it means to be a Personal Representative in Florida? Check out our FAQ video library here.