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Navigating Probate: Understanding the Complexities of Deceased Borrowers in Texas

The aging population in Texas has been on the rise, resulting in a higher number of deceased borrowers who leave behind complicated situations for their families and mortgage lenders.

When the borrower passes away, the mortgage loan becomes due and payable in full, even if the estate cannot cover the remaining balance. This can lead to probate proceedings and a struggle for the deceased borrower’s loved ones to keep their home.

The probate process in Texas is cumbersome, and notice requirements for creditors can be complex, particularly for secured creditors who have a legal claim to the property. It puts secured lenders, such as mortgage companies, in a precarious position–particularly if the decedent included this in their planning for this in their estate plan.

Probate Process in Texas

While Texas law provides for independent administrations, i.e., those that are not monitored by the probate court, the Texas probate process is cumbersome. It is common for probate cases to last a full year or more.

Part of this process involves providing creditors or would-be creditors with notice and waiting for them to respond. In the probate process in Texas, secured creditors may respond by filing a claim against the estate of a deceased person to recover debts owed to them by the deceased. However, their claims may be subject to certain limitations, such as the requirement to provide notice to them within a specified time, as explained below.

The claims process starts with notice requirements. The Texas Estates Code sets out notice requirements for creditors. The law divides creditors into secured creditors and unsecured creditors. Let’s start with unsecured creditors, as most probate disputes and litigation involve unsecured creditors.

Unsecured Creditors: Permissive Notice

An unsecured creditor is a person or entity that has provided goods or services to another party but has not been granted a security interest or lien against any of the debtor’s assets. In other words, the creditor does not have any collateral to secure the debt owed to them.

Examples of unsecured creditors include credit card companies, suppliers, and vendors who have provided goods or services on credit without requiring collateral. Credit card companies that are owed money are an example.

The personal representative, who is appointed by the court to manage the estate, has the option to give notice to unsecured creditors that they must submit their claims within four months of receiving the notice.

The personal representative can send the notice by certified or registered mail at any time before the probate is closed. The notice should include the date when the representative’s letters were issued, the address where the claim can be presented, and instructions on how to address the claim.

The notice is not mandatory, but if the personal representative chooses to give it, and the creditors fail to submit their claims within the specified time, the claims may not be considered in the probate process. This means that if the claims are not submitted within the specified time, they will be forever barred, which means the creditors will lose their right to recover the debts they are owed from the estate.

There are several disputes involving these rules. For example, we previously considered the case of a business owner who owned a business that took out a loan. The owner signed a personal guarantee for the loan. While the business had a secured loan, the personal guarantee was unsecured.

Secured Creditors: Mandatory Notice

A secured creditor is a lender or creditor who has a legal right to a specific asset or property owned by a debtor to secure the repayment of a debt. This means that the creditor has a security interest or lien on the property as collateral for the loan or debt owed by the debtor.

A secured creditor is a lender or creditor who holds a security interest in property owned by a debtor. In the probate process, a secured creditor may have a legal claim to property owned by the deceased person as collateral for a debt owed to them by the deceased.

Examples of secured creditors include mortgage lenders, car loan lenders, and other lenders who take a security interest in property to secure their loans.

In Texas, the personal representative is required to provide notice to all known secured creditors within two months of receiving letters testamentary (or letters of administration when there is no will). The personal representative must file the notice and return receipt, along with an affidavit of mailing, with the county clerk.

Failure to provide notice to a secured creditor may result in the estate and/or personal representative being liable for any damages suffered by the creditor. It is therefore important for the personal representative to comply with this requirement to avoid any potential liability.

The Preferred Debt and Lien vs. Matured Secured Claim

When the secured creditor receives the notice, they have the option to treat the claim as a preferred debt and lien claim or as a matured secured claim.

A preferred debt and lien claim gives the creditor the right to be paid from the proceeds of the sale of the property before other creditors. On the other hand, a matured secured claim gives the creditor the right to claim the collateral or property securing the debt if the debtor fails to pay.

In either case, the secured creditor’s claim takes priority over unsecured claims in the probate process.

The choice between these two options can be important for the creditor, particularly if the value of the collateral has decreased significantly. This brings us to the paradox for secured creditors.

If the value of the collateral has declined, the creditor will not want a preferred debt and lien as this may result in recovering only the diminished value of the collateral. If on the other hand, the value of all of the assets has declined or is insufficient, the matured secured claim can also be problematic.

Most creditors are not able to adequately assess the value of the collateral or the value of the overall estate, which puts them in a precarious position. They often have to make a choice without knowing the facts and circumstances as to which choice to make.

Special Loan Programs

Many personal representatives want to do right by the decedent and honor their commitments even if the law does not require them to do so. This may be out of a sense of honor or duty or, more practically, out of a desire to continue to live in the property that is subject to a mortgage (or to use the car that is subject to a loan).

Lenders will often have special loan programs to help bridge this gap. These loan programs can help to ease the financial burden on their families, while also reducing the risk with the unknown values noted above.

These programs can allow the family members or estate to pay off the loan over a longer period of time, or provide an option for the heirs to assume the loan and keep the home. This can be a win-win for all parties.

The Takeaway

The issue of deceased borrowers in Texas is a complex and challenging one, and requires careful consideration and planning. Whether it’s through estate planning or special loan programs offered by mortgage lenders, it’s important to take steps to protect families from the financial and emotional stress that can result from a borrower passing away. If you are facing probate issues in Texas, Kreig LLC offers a FREE attorney consultation by calling (281) 219-9090. Our experienced probate attorneys will work with you to provide the guidance and support you need during this difficult time.

Our Houston Probate Attorneys provide a full range of probate services to our clients, including helping with disputes between heirs. Affordable rates, fixed fees, and payment plans are available. We provide step-by-step instructions, guidance, checklists, and more for completing the probate process. We have years of combined experience we can use to support and guide you with probate and estate matters. Call us today for a FREE attorney consultation.


The content of this website is for informational purposes only and should not be construed as legal advice. The information presented may not apply to your situation and should not be acted upon without consulting a qualified probate attorney. We encourage you to seek the advice of a competent attorney with any legal questions you may have.

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