How Security Affects What a Creditor Receives
Not all creditor claims stand on equal footing. Some creditors hold collateral, like a mortgage on estate property or a lien on specific assets.
This statute governs how secured claims are paid during probate. The basic rule is straightforward. A creditor should not receive both the collateral and the full claim amount.
Payment of a secured claim is upon the basis of the amount allowed if the creditor surrenders his security, otherwise payment is upon the basis of one of the following: 1. If the creditor exhausts his security before receiving payment, unless precluded by other law, upon the amount of the claim allowed less the fair value of the security.
A.R.S. § 14-3809If the creditor gives up the collateral, they get paid the full allowed amount. If they keep the collateral, the estate only pays the difference. This means the claim amount is reduced by the collateral's value.
Determining the Value of Security
When the creditor keeps their security but has not yet converted it to cash, the value must be set. The law provides several options.
The security can be valued by the terms of the original agreement. It can also be set by mutual agreement, through arbitration, by compromise, or through litigation.
This flexibility matters because collateral values can be contested. For example, a mortgage holder and a personal representative may disagree on a property's fair market value.