How Security Affects What a Creditor Receives
Not all creditors stand on equal footing. Some hold collateral, like a mortgage on estate property or a lien on specific assets. This statute governs how those secured claims are paid during estate administration. The basic principle 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 from the estate. If they keep the collateral, the estate only pays the difference between the claim and the collateral's value.
Determining the Value of Security
When the creditor retains their security but has not yet converted it to cash, the value must be determined. Arizona law provides several options: the security can be valued according to the terms of the original agreement, by mutual agreement between the creditor and the personal representative, through arbitration, by compromise, or through litigation.
This flexibility matters because collateral values can be contested. A mortgage holder and a personal representative may disagree on the fair market value of a property. The statute ensures there is a path to resolution without forcing every dispute into court. For personal representatives managing estates with secured debts, understanding this distinction helps avoid overpaying creditors and preserves more of the estate for beneficiaries.