Short Answer

In North Carolina, a personal representative must pay estate expenses in the statutory order, with costs of administration first and federal claims (like an SBA claim) high in priority. A debt discharge can create taxable “cancellation of debt” income to the estate, so document solvency, reserve for tax, and seek court approval before finalizing the SBA deal. Publish and mail notice to creditors, classify claims by statute, and time any SBA settlement and 1099-C so you can fund commissions, attorney fees, and taxes. If records are missing, move quickly to obtain prior returns and set the estate’s EIN with tax agencies.

Understanding the Problem

You are the personal representative in North Carolina asking how to handle an SBA debt workout that will trigger taxable cancellation-of-debt income for the estate. The immediate decision is how to prioritize and fund commissions, counsel fees, the SBA settlement, and taxes, and how to control the timing of any 1099-C tied to the discharge. One salient fact: the estate is illiquid and includes an interest in a closely held company.

Apply the Law

North Carolina law requires you to notify creditors, receive and classify claims, and pay them in a strict order. Costs of administration come first, and federal claims are paid ahead of general unsecured debts. Within a class there is no preference, so similarly ranked creditors share pro rata if funds are short. A personal representative may compromise claims and should seek the Clerk’s approval in an estate proceeding when a settlement affects priority, taxes, or insolvency. A discharged SBA balance may generate taxable income to the estate; if the estate is insolvent, federal law may allow exclusion, but you must substantiate insolvency and preserve tax attributes. The estate files fiduciary income tax returns (federal and North Carolina) and should reserve for any cancellation-of-debt tax before agreeing to a discharge.

Key Requirements

• Classify and prioritize claims: Pay costs of administration first; federal claims (including SBA) rank ahead of general creditors; no preference within a class.
• Wait for the claims window: Publish notice and mail to known creditors; do not pay lower-priority debts before the claims period ends unless the estate is clearly solvent.
• Court oversight for settlements: Use an estate proceeding to approve an SBA compromise, authority to reserve for taxes, and payment sequence when funds are tight.
• Address cancellation-of-debt (COD) tax: Coordinate 1099-C timing; document estate solvency/insolvency; reserve for federal and state fiduciary income tax before finalizing.
• Secure records and tax IDs: File IRS Form 56, obtain an estate EIN, and locate prior personal and business returns to prepare accurate fiduciary filings.

What the Statutes Say

• North Carolina Gen. Stat. § 28A-19-6 (Order of payment of claims) – Sets the required priority of estate debts and expenses.
• North Carolina Gen. Stat. § 28A-19-3 (Presentation and bar of claims) – Establishes the creditor bar dates and exceptions.
• North Carolina Gen. Stat. § 28A-13-3 (Powers of personal representative) – Authorizes compromising claims and other administration powers.
• North Carolina Gen. Stat. § 28A-23-3 (Commissions and allowances) – Governs PR commissions and approval by the Clerk.

Analysis

Apply the Rule to the Facts: Your commissions and reasonable attorney fees are first-priority costs of administration, so reserve for them before paying other claims. The SBA’s claim is a federal claim and must be handled ahead of general unsecured creditors; seek the Clerk’s approval to compromise and to set a tax reserve tied to any 1099-C. Because the estate is illiquid and holds a closely held business interest, time the settlement so you can create liquidity and document insolvency if applicable, then file fiduciary returns reflecting any COD income or exclusions.

Process & Timing

1. Who files: Personal representative. Where: Clerk of Superior Court, Estates Division (county of administration in North Carolina). What: Publish notice to creditors and later file the affidavit of publication; file the 90‑day inventory; if settling the SBA claim or setting a tax reserve, file a verified petition in an estate proceeding for approval/instructions. When: Publish once a week for four consecutive weeks; set the bar date at least three months after first publication; mail notice to known creditors and agencies and track their 90‑day window; file the inventory within 90 days of qualification.
2. After the bar date, classify claims by statute, confirm funds on hand, and seek an order approving the SBA compromise, the payment sequence, and a reserve for taxes and fees. Hearing timelines vary by county; allow several weeks for scheduling and review.
3. Coordinate with SBA on the timing of any discharge and 1099‑C so the estate has an EIN, funds set aside, and records in hand. File federal Form 1041 and North Carolina D‑407 for the estate by their due dates; then submit the final account for Clerk approval and close the estate.

Exceptions & Pitfalls

• Federal claims are not cut off by the state notice-to-creditors bar; treat SBA as a high‑priority creditor.
• Paying in the wrong order can create personal liability for the personal representative; get court instructions if priorities or insolvency are unclear.
• Failing to reserve for COD tax before the discharge may leave the estate short; coordinate 1099‑C timing and document insolvency if claiming an exclusion.
• Do not pay or advance commissions or attorney fees without the Clerk’s approval and supporting accounting.
• Notice errors (not mailing known creditors like SBA) can extend deadlines and disrupt your payment plan.

Talk to a Probate Attorney

If you’re dealing with an SBA settlement that may trigger taxable income in a North Carolina estate, our firm has experienced attorneys who can help you understand your options and timelines. Call us today at [919-341-7055].

Disclaimer: This article provides general information about North Carolina law based on the single question stated above. It is not legal advice for your specific situation and does not create an attorney-client relationship. Laws, procedures, and local practice can change and may vary by county. If you have a deadline, act promptly and speak with a licensed North Carolina attorney.