A personal representative (PR) of a probate estate is liable to creditors or beneficiaries if the PR wrongfully distributes money or applies probate estate property to his personal use. The misuse of probate estate funds is known as “defalcation” which is similar to fraud. One way in which defalcation is different from fraud is that fraud requires showing of fraudulent intent whereas a PR can be liable for defalcation without intent where the misappropriation of estate property was the result of negligence. Good faith is no defense to defalcation
Asset protection in the face of defalcation is more difficult than protection against civil judgments. Liability is not limited to imposition of a civil judgment. In the first place, a probate judge can hold the PR in contempt of court if he does not return funds dissipated in defalcation. Failure to return the funds could result in incarceration for civil contempt. Secondly, the PR cannot discharge liability for defalcation in a Chapter 7 bankruptcy pursuant to Section 523 (a)(4) of the Bankruptcy Code. That section prohibits discharge of debts incurred as a result of fraud or defalcation.
However, Chapter 13 bankruptcy may offer protection for the PR found to have misappropriated probate property. The so-called “super discharge” in Chapter 13 does not exclude liability described in Section 523(a)(4) of the Bankruptcy Code. Therefore, a PR could gain protection in a Chapter 13 plan that provides for repayment over many years of a fraction of amounts which the PR lost from a probate estate.