Short answer. In the order of preference the Civil Code sets, not first-come-first-served. When the assets cannot cover the debts, the administrator pays observing the Civil Code's rules on concurrence and preference of credits: preferred classes are paid in full first, and within a class that cannot be fully paid, each creditor receives a proportionate dividend.
What the law says
If the assets which can be appropriated for the payment of debts are not sufficient for that purpose, the executor or administrator shall pay the debts against the estate
Rule 88, Section 7 — Order of payment if estate insolvent. Read the full provision →
What the law says
each creditor within such class shall be paid a dividend in proportion to his claim. No creditor of any one class shall receive any payment until those of the preceding class are paid.
Rule 88, Section 8 — Dividends to be paid in proportion to claims. Read the full provision →
Insolvency changes the rule of payment
While an estate is solvent, the order in which debts are settled matters little — everyone gets paid. The moment the debts outgrow the assets, order becomes everything. Rule 88, Section 7 provides: If the assets which can be appropriated for the payment of debts are not sufficient for that purpose, the executor or administrator shall pay the debts against the estate observing the Civil Code's provisions on concurrence and preference of credits. The Rules of Court do not carry their own ranking; they adopt the Civil Code's scheme, under which some credits are tied to specific property and others enjoy a general preference, in a fixed sequence.
Classes first, then dividends within a class
Section 8 supplies the arithmetic. Creditors are grouped into classes by the preference their credits carry, and the classes are worked through strictly in order: no creditor of a lower class receives anything until the class above is fully paid. When the money runs out partway through a class, each creditor within such class shall be paid a dividend in proportion to his claim. So an insolvent estate does not pick and choose among equal creditors — those similarly ranked share pro rata in whatever remains, and those ranked below them may receive nothing at all.
What this means if you are a creditor
File your claim in the estate proceeding regardless of how the estate looks — only filed claims share in the distribution. Where you stand in the queue depends on the nature of your credit and the documents behind it: a credit secured over specific property is in a very different position from an unsecured personal loan. Be realistic about the dividend: if your class is reached at all, you may recover a proportion of your claim rather than the whole. And watch the administrator's accounts, because a payment made to a creditor out of order is exactly the kind of act the class rule exists to prevent.
What this means if you are an heir
Debts come before inheritance. If the estate is genuinely insolvent, the creditors — in their order — exhaust the assets available for the payment of debts, and there is nothing left to distribute. What heirs are not, in general, is personally answerable for the shortfall: the creditors' recourse under these sections runs against the estate's assets, in the sequence described. For a family facing an insolvent estate, the practical questions are which claimed debts are real and provable, how each is ranked, and whether the administrator is applying the classes correctly — all of which play out in the settlement proceeding under the court's eye.
Related provisions
- Rule 88, Section 7 — Order of payment if estate insolvent
- Rule 88, Section 8 — Dividends to be paid in proportion to claims