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Vermont Debt Payment Priority
Support GuideVermont21 min read

Vermont Debt Payment Priority

14 V.S.A. § 1205 ranks a Vermont estate's debts in four classes, and that order binds only when the assets fall short of paying every claim.

By Settled Editorial

Vermont pays estate debts in the four classes 14 V.S.A. § 1205 sets out. Costs and expenses of administration come first, then funeral, burial and headstone expenses with perpetual care up to $3,800.00 alongside the medical bills of the last illness, then wages earned in the three months before the death up to $300.00 for each employee, then everything else.

One condition governs all of it, and cross-state writing about Vermont drops it. Section 1205(a) applies only "if the applicable assets of the estate are insufficient to pay all claims in full." A Vermont estate that can cover its allowed claims pays them and never sorts anybody into a class. This guide walks the four classes, the proration rule inside a class, the allowances that come off the top before any creditor is paid, the federal claim that outranks the entire ladder, and the moment an executor's own money goes at risk. Read it beside how a claim gets presented and the Vermont executor duties guide. Anything close to the line belongs with the county Probate Division or a licensed Vermont attorney.

The Four Classes of 14 V.S.A. § 1205

Section 1205 is titled Classification of claims. Read it from the top down.

OrderClass as § 1205(a) prints itWhat lands here
1(1) costs and expenses of administrationThe filing fee under 32 V.S.A. § 1434, the fiduciary's reasonable fee and necessary expenses under 14 V.S.A. § 1065, attorney and appraisal charges, the bond premium, and the cost of holding estate property
2(2) reasonable funeral, burial, and headstone expenses, and perpetual care, not to exceed $3,800.00 exclusive of governmental payments, and reasonable and necessary medical and hospital expenses of the last illness of the decedentThe funeral home bill, burial or cremation, the headstone, cemetery perpetual care, and the last-illness medical and hospital charges, including compensation of the people who attended the decedent
3(3) wages due employees which have been earned within three months prior to the death of the decedent, not to exceed $300.00 to each claimantUnpaid wages of anyone the decedent employed, counted per claimant rather than per estate
4(4) all other claims; including the balance of wages due but unpaid under subdivision (3)Credit cards, personal loans, utility accounts, older medical bills, promissory notes, money judgments, and the part of a wage claim above $300.00

Two details inside that table decide real dollars.

The $3,800.00 cap sits with the funeral group. In the printed text the figure follows the funeral, burial, headstone and perpetual-care list and comes before the clause on medical and hospital expenses of the last illness, which carries no separate figure of its own. Where a hospital bill from the final weeks is large enough that the reading changes who gets paid, that is a question for the Probate Division before the checks go out rather than after.

A wage claim splits across two classes. The first $300.00 an employee is owed for work done in the three months before the death rides in class three. Everything above that drops to class four by the express words of subdivision (4) and competes there with the credit cards.

No Preference Inside a Class

Section 1205(b) is the second half of the rule. 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, but the assets shall be prorated where they cannot satisfy all claims within the class.

So a creditor whose bill came due in March gets no head start over one whose note matures next year. Suppose an estate clears classes one through three and holds $18,000 against $60,000 of ordinary claims. Each class-four creditor receives 30 cents on the dollar, and the heirs receive nothing, which is the ordinary arithmetic of an insolvent Vermont estate.

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Vermont Retired Its Insolvency Machinery in 1975

Two chapters of Title 14 still appear on the table of contents under names that sound alive. Chapter 65, "Commissioners and Allowance of Claims," and chapter 67, "Payment of Debts and Expenses," each carry exactly one line on their own chapter page: §§ 1151-1171. Repealed. 1975, No. 240 (Adj. Sess.), § 12. and §§ 1251-1273. Repealed. 1975, No. 240 (Adj. Sess.), § 12.

Anything describing a Vermont commissioner of insolvency, a report of commissioners, or an appeal from commissioners describes machinery the State dismantled fifty years ago. There is no separate insolvency petition in a full Vermont administration. The classification in § 1205 is the procedure.

The small estate is the one place a distinct step survives. 14 V.S.A. § 1903(a)(1) says that if it appears from the record that the estate is insolvent, the fiduciary shall apply for an order of dividend from the court, and only a solvent small estate is settled directly with known and reasonably ascertainable creditors. The Vermont small estate guide covers the $45,000.00 route itself.

Allowances Come Off the Top

Before the ladder starts, something is taken out of the estate. 14 V.S.A. § 1207(a) tells the fiduciary to pay allowed claims in the order of priority prescribed "after making provision for homestead, family, and support allowances," and also after providing for claims already presented but not yet allowed, allowances under appeal, unbarred claims that may still arrive, and the costs of administration.

Three sections supply those allowances, and not one of them carries a dollar figure.

  • § 316, allowances for the surviving spouse and family during administration. The Probate Division may allow reasonable support and maintenance for the surviving spouse and minor children out of the personal estate or the income of real or personal estate, from the date of death until settlement. In an insolvent estate the allowance runs no longer than eight months after administration is granted. The closing sentence is the one that matters here: this allowance "may take priority, in the discretion of the court, over debts of the estate."
  • § 317, allowance to children before payment of debts. The court may allow support for the decedent's children until they turn 18 and may order the fiduciary to hold back enough assets for it. The statute says that allowance shall be made before any distribution of the estate among creditors, heirs, or beneficiaries by will.
  • § 318, allowance to children after payment of debts. The same support may be set aside before any partition or division of the estate among heirs or beneficiaries.

Each of these is discretionary and each is sized by the judge. The Vermont surviving spouse rights guide covers the elective share and the homestead interest, which answer a different question from support during administration.

A Federal Claim Outranks the Whole Vermont Ladder

Section 1205 drops federal taxes into class four with everyone else, and federal law does not accept that ranking. 31 U.S.C. § 3713(a)(1)(B) says a claim of the United States Government shall be paid first when "the estate of a deceased debtor, in the custody of the executor or administrator, is not enough to pay all debts of the debtor."

Subsection (b) puts the fiduciary personally on the hook: a representative of an estate who pays any part of a debt of the estate before paying a claim of the Government "is liable to the extent of the payment for unpaid claims of the Government." An executor of an insolvent Vermont estate who learns of unpaid federal tax should get advice before paying anything else, because the two rules point in different directions and the federal one carries the personal exposure.

Nothing Gets Paid for Four Months

Section 1207(a) opens the payment window at four months from the date of first publication of the notice to creditors. At that point the fiduciary proceeds to pay allowed claims in order. A creditor whose claim was allowed but left unpaid may petition the court for an order directing payment to the extent estate funds are available.

Paying earlier is permitted and it is where executors get hurt. Section 1207(b) lets the fiduciary pay any just claim that has not been barred, with or without formal presentation, and then makes that fiduciary individually liable to any other allowed claimant injured by the payment in two situations:

  1. The payment went out before the four months expired and the fiduciary failed to require the payee to give adequate security for the refund of whatever part of it is needed to pay other claimants.
  2. The payment was made, through the negligence or willful fault of the fiduciary, in a way that deprived the injured claimant of priority.

Read those two together and a rule falls out. Pay a class-four credit card in month two, watch a class-two funeral bill arrive in month three with nothing left, and the shortfall is the fiduciary's problem rather than the creditor's. The four-month wait ties back to presentment, which the Vermont creditor claims guide works through, and the dates land on the calendar in the Vermont probate deadlines guide.

Secured Debts Sit Outside the Contest

A mortgage follows the house and a car loan follows the car, whatever § 1205 says about rank.

Section 1209 pays a secured claim on the full allowed amount where the creditor surrenders the security. Where the creditor keeps it, payment runs on the allowed amount less the fair value of the security if the creditor exhausts it, or less the value reached by converting the security into money under the security agreement, by agreement with the fiduciary, or by arbitration, compromise or litigation. What competes in the ladder is the unsecured remainder.

Section 1214 gives the fiduciary room to act on encumbered property. Unless the will says otherwise, the executor or administrator may pay off an encumbrance in whole or in part, renew or extend the obligation, or convey the asset to the lienholder in satisfaction, whether or not that creditor ever filed a claim, where it appears to be in the best interests of the estate. Paying an encumbrance does not enlarge the share of the person who inherits that asset unless they are entitled to exoneration.

Section 1212 closes the loop. No execution may issue and no levy may be made against estate property under a judgment against the decedent or the fiduciary, and the section expressly preserves the enforcement of mortgages, pledges and liens in an appropriate proceeding.

Selling Property to Raise the Money

An estate that owns real property and holds no cash still has to pay class one. 14 V.S.A. § 1611 lets the Probate Division of the Superior Court order the sale of all or part of the personal or real estate of the estate when it appears necessary or beneficial for the administration of the estate. A petition for license to sell or convey real estate costs $100.00 under 32 V.S.A. § 1434(a)(26), and the same $100.00 applies to personal property under subdivision (a)(27). Both are administration expenses, so they ride at the top of the ladder rather than competing lower down.

When the Probate Estate Cannot Cover It

A revocable living trust is not a wall. 14A V.S.A. § 505(a)(3) provides that after the settlor's death, and subject to the settlor's right to direct the source from which liabilities will be paid, the property of a trust that was revocable at the settlor's death answers the settlor's creditors, the costs of administration of the settlor's estate, the expenses of the funeral and disposal of remains, and statutory allowances to a surviving spouse and children, to the extent the probate estate is inadequate. The opening words of § 505(a) apply that rule "[w]hether or not the terms of a trust contain a spendthrift provision."

That reach matters most to families who planned around probate. The Vermont guide to avoiding probate covers what a revocable trust does and does not put beyond a creditor.

Medicaid Files as a Creditor, Not as a Class

Vermont has no assistance class in § 1205, which sets it apart from several neighboring states. Medicaid Covered Services Rule 7108.3 says the Department of Vermont Health Access "will file a claim with the probate court as a creditor of the estate," and a claim with no class of its own falls into class four by the terms of subdivision (4).

What Vermont does treat differently is the clock. 14 V.S.A. § 931 bars pre-death claims not presented within a year of the death, and it carves out claims filed by the State on behalf of Vermont Medicaid, sending them to § 1203(d) instead. Rank and deadline are separate questions in this state, and mixing them is how a family concludes the Department gets paid first.

If the Gifts in the Will Have to Shrink

Once the debts are settled, a second ordering question can open. Where what remains cannot fund every gift the will makes, 14 V.S.A. § 338 sets the abatement sequence: property not disposed of by the will, then residuary devises and bequests, then general devises and bequests, then specific devises and bequests. Within a classification, shares abate in proportion to what each beneficiary would have taken on full distribution.

Two qualifications ride along. Section 338(b) gives way to the will's own order of abatement, or to the testamentary plan where the default sequence would defeat it. Section 338(c) requires contribution from other interests where a preferred gift is sold or used during administration. This is a distribution rule among beneficiaries, not a creditor rule, and the two are easy to conflate.

Where the Executor's Own Money Is at Risk

Four provisions decide whether a payment order mistake stays with the estate or follows the fiduciary home.

  • § 1207(b) attaches liability to an early payment made without security for refund, and to any payment that negligence or willful fault turned into a lost priority for someone else.
  • 31 U.S.C. § 3713(b) attaches liability for the amount paid whenever any other debt is paid ahead of a claim of the United States out of an insufficient estate.
  • § 1208(b) limits the ordinary case: a fiduciary answers individually for obligations arising from ownership or control of the estate, or for torts committed during administration, only where personally at fault. Subsection (a) keeps the fiduciary off a contract properly entered into in that capacity, provided the representative capacity and the estate were disclosed.
  • § 1213 lets the fiduciary compromise a presented claim, due or not due, absolute or contingent, liquidated or unliquidated, where it appears to be in the best interests of the estate. On a thin estate a negotiated number beats a contested one.

Three habits recur in insolvent Vermont estates that stay out of that territory: solvency tested against the 60-day inventory before any discretionary payment, funds held through the four-month window so a higher class arriving late still finds money, and distribution taken last, because class four and the beneficiaries both lose when the sequence runs backward. A special administrator has an easier job on this point: § 964 says a special administrator is not liable to an action by a creditor and does not pay the debts of the deceased at all, though with the court's consent that appointee may pay the expenses of the last sickness and the funeral.

Every payment belongs in the account the fiduciary files, and the Vermont probate accounting guide covers how that record is built. The Vermont probate guide walks the case from the petition to the discharge.

Frequently Asked Questions

What order does Vermont pay estate debts in?

14 V.S.A. section 1205(a) sets four classes. First, costs and expenses of administration. Second, reasonable funeral, burial and headstone expenses and perpetual care, not to exceed $3,800.00 exclusive of governmental payments, together with the reasonable and necessary medical and hospital expenses of the last illness. Third, wages earned by employees in the three months before the death, capped at $300.00 for each claimant. Fourth, all other claims, including the wage balance above $300.00.

Does the Vermont priority order apply to every estate?

No. Section 1205(a) opens with a condition: the classes apply if the applicable assets of the estate are insufficient to pay all claims in full. A Vermont estate that can cover its allowed claims pays them and never sorts a creditor into a class. The ladder is an insolvency rule, not a routine payment sequence.

What happens when the money runs out partway through a class?

It is split proportionally. 14 V.S.A. section 1205(b) says 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 is not entitled to a preference over claims not yet due. Where the assets cannot satisfy every claim within a class, the statute directs that they be prorated.

Does Vermont Medicaid get paid ahead of credit cards?

Vermont's ladder has no assistance class. Medicaid Covered Services Rule 7108.3 says the Department of Vermont Health Access will file a claim with the probate court as a creditor of the estate, so the claim takes its place in class four of section 1205 beside the other unsecured claims. What is different about Medicaid in Vermont is the clock, not the rank: 14 V.S.A. section 1203(d) gives those claims their own four-month rule.

Can a Vermont executor pay a bill before the four months are up?

14 V.S.A. section 1207(b) allows it for any just claim that has not been barred, with or without formal presentation, and then attaches personal liability. The executor or administrator answers to any other allowed claimant injured by the payment where the payment went out before the four months expired without the payee giving adequate security for a refund, or where negligence or willful fault deprived that claimant of priority.

Does a surviving spouse's allowance come ahead of Vermont creditors?

It can. 14 V.S.A. section 1207(a) directs the fiduciary to pay claims in the order of priority after making provision for homestead, family and support allowances. Section 316 lets the Probate Division allow reasonable support for the surviving spouse and minor children out of the estate, and says the allowance may take priority, in the discretion of the court, over debts of the estate. In an insolvent estate that allowance runs no longer than eight months after administration is granted.

Is there a Vermont proceeding for declaring an estate insolvent?

Not in a full administration. 14 V.S.A. chapter 65 and chapter 67 were both repealed in their entirety by 1975 Act 240, section 12, so the commissioners of insolvency Vermont once used no longer exist and the classification in section 1205 is the whole procedure. A small estate is the exception: section 1903(a)(1) says that if it appears from the record that the estate is insolvent, the fiduciary shall apply for an order of dividend from the court.

Do secured debts fit into the Vermont classes?

Only the shortfall does. 14 V.S.A. section 1209 pays a secured claim on the full allowed amount if the creditor surrenders the security, and otherwise on the allowed amount reduced by the value of that security, so what competes in the class is the unsecured remainder. Section 1212 blocks execution and levy against estate property while leaving a mortgage, pledge or lien enforceable in its own proceeding.

Related Guides

This page is general information about the order Vermont estates pay debts in, not legal advice about any particular estate. Whether an estate is insolvent, which class a claim belongs to, and what a fiduciary may safely pay all turn on figures and dates specific to one file, so the Probate Division of the Superior Court for the decedent's county or a licensed Vermont attorney is where those questions belong.

Sources:

It is not legal advice.

Information current as of August 4, 2026

Settled Estate is not a law firm, and this content is for informational purposes only and does not constitute legal advice. Probate laws and procedures in Vermont can change. Consult with a qualified attorney for advice specific to your situation. Full disclaimer.

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