What rights do secured creditors have against an estate?


A personal representative must provide a secured creditor with notice of an estate administration.  Once informed, the secured creditor must make an election within 6 months of the date the personal representative received letters or four months after receiving notice, whichever is later, to be treated as a:


  • “Preferred debt and lien” (in which case it waives its right to realize on the decedent’s personal liability and looks solely to the security interest for satisfaction of the obligation) or


  • “Matured secured claim” (in which case if the sale of the property is insufficient to pay the secured creditor’s claim, the secured creditor can collect any deficiency as a Class 8 claim; the matured secured claim itself is treated as a Class 3 claim, behind funeral expenses and expenses of administration, i.e. attorney’s fees and expenses).


In our experience, ninety-nine percent of all creditors proceed as a preferred debt and lien.  In other words, they want to jump to the beginning of the line and take their collateral.  If the secured claim is not timely presented, or if the claim is presented without specifying how the claim is to be paid, it will be treated as a “preferred debt and lien” and no deficiency will be allowed against any other estate assets.


If the property securing a claim that is allowed as a preferred debt and lien is not sold or distributed within six months from the date letters are granted, then the Estate must promptly pay all the maturities which have accrued on the debt according to the terms of the contract and must perform all of the terms of the contract.  If the estate cannot makes these payments, then if the secured creditor makes a proper application, the Court can require the property to be sold and authorize the foreclosure.  Keep in mind, that in practice, the six-month deadline really depends on whether the secured creditor takes action to enforce the deadline.  In most cases, banks cooperate in providing reasonable extensions.