What If There is Not Enough Money To Pay Your Debts When You Die in New Jersey?

When a person dies in New Jersey leaving more debts than assets, that decedent has an “insolvent estate” which is defined by the New Jersey Rules of Court as an estate in which “the real and personal estate of the decedent is insufficient to pay debts.” R. 4:91-1(a). Pursuant to R. 4:91-1(a), an executor/administrator (“fiduciary”) of an insolvent estate may commence an action in the Superior Court, Chancery Division, Probate Part, by filing a Complaint at any time after nine (9) months following the date of decedent’s death. The Complaint must state “to the best of the fiduciary’s knowledge and belief, the real and personal estate of the decedent is insufficient to pay debts.” Id. The insolvency action must be initiated by Order to Show Cause. Notice must be given to creditors that have presented claims against the estate, and to “other interested persons.” R. 4:91-1(a); 4:91-2.
Along with the Complaint, the fiduciary must file: (1) an account, in accordance with R. 4:87-3, and (2) a list of creditors who have presented claims within nine months following the date of decedent’s death, or which the executor of administrator intends to allow without requiring the submission of a formal claim. R. 4:91-1(b).
For each creditor, the fiduciary must list: (1) the amount of each claim; (2) whether the claim has been allowed or rejected; (3) whether the claim is entitled to a statutory priority; and (4) whether the claim is based on judgment, bond, note, book account, or otherwise. R. 4:91-1(b). Once presented with the report of claims, and the presentation of the account, the court “may” adjudge the estate to be insolvent and determine the amount of each claim and the priority for payment of each claim. R. 4:91-1(c).
If upon an adjudication and determination, it appears to the court that the estate is insufficient to pay the debts, or whenever it appears to the satisfaction of the court, upon consideration of the claims of creditors and the amount of the estate and the value thereof that the estate is insufficient to pay the debts and that the estate is likely to be insolvent, the court may enter judgment to this effect, and direct the personal representative to proceed as if the estate were insolvent, and to make sale of the whole or any part of the estate of his decedent, from time to time, as may appear expedient. N.J.S.A. 3B:22-35. 
It must be noted that a mortgage on real property (if any) is not affected by the estate’s insolvency. Pursuant to N.J.S.A. 3B:25-1:
"When property subject to a mortgage or security interest descends to an heir or passes to a devisee, the heir or devisee shall not be entitled to have the mortgage or security interest discharged out of any other property of the ancestor or testator, but the property so descending or passing to the person shall be primarily liable for the mortgage or secured debt, unless the will of the testator shall direct that the mortgage or security interest be otherwise paid. A general direction in the will to pay debts shall not be deemed a direction to pay the mortgage or security interest."
This Statute allows mortgages to pass with the real property, regardless of insolvency. See Investors Sav. Bank, Inc. v. Sitzman, 2010 N.J. Super. Unpub. LEXIS 1333, *8-9, 2010 WL 2471122 (App. Div. June 18, 2010) (“Thus, it is clear that the legislative scheme intends to insure that whether an estate is insolvent or not, payment of the mortgage debt on real property is to be satisfied primarily from the property itself, not from the assets of the estate. The mortgage can be exonerated and discharged from the assets of the estate only if the testator clearly directs that the debt be paid in some other manner.”).
Under N.J.S.A. 3B:22-2, if the applicable assets of the estate are insufficient to pay all claims in full, the personal representative shall make payment in the following order:
a. Reasonable funeral expenses;
b. Costs and expenses of administration;
c. Debts for the reasonable value of services rendered to the decedent by the Office of the Public Guardian for Elderly Adults;
d. Debts and taxes with preference under federal law or the laws of this State;
e. Reasonable medical and hospital expenses of the last illness of the decedent, including compensation of persons attending him;
f. Judgments entered against the decedent according to the priorities of their entries respectively;
g. All other claims.
No preference shall be given in the payment of any claim over any other claim of the same class, and a claim due and payable shall not be entitled to a preference over claims not due. The commencement of an action against the personal representative for the recovery of a debt or claim or the entry of a judgment thereon against the personal representative shall not entitle such debt or claim to preference over others of the same class.
Pursuant to N.J.S.A. 3B:22-22, the real property of any person who shall die seized thereof or entitled thereto shall be and remain liable for the payment of his debts for 1 year after his decease, but may be sold free from liability for payment of debts by his personal representative upon application to the court upon terms and conditions as the court may direct for the protection of creditors, any alienation or encumbrance made or attempted to be made by his heirs or devisee to the contrary notwithstanding.
Once the estate is declared insolvent, pursuant to N.J.S.A. 3B:22-32, if the estate of a decedent is insufficient to pay his debts, his estate shall be applied to the preferred expenses and debts in accordance with N.J.S.A. 3B:22-2, and the balance shall be distributed among his creditors in proportion to the sum due to each.  

Certain property is exempt from the payment of claims. According to N.J.S.A. 3B:16-5, clothing of a decedent and his personal property to the value of $5,000.00 shall be reserved to and for the use of his family against all creditors. Creditors may receive payment of claims from non-probate property except proceeds of a life insurance policy left to a named beneficiary
We at Pashman Stein Walder Hayden, P.C. have assisted many families in such matters. If you need assistance with administering an insolvent estate, please contact us.