Death and financial hardship are among the least popular subjects for conversation. However, like many critical legal and financial matters, the effects of a deceased person’s obligations on his or her loved ones should be familiar to every responsible adult.
Who is responsible for these obligations? Are family members liable for the inherited debt? A greater grasp of what is likely, possible, and prohibited can be gained by following some fundamental rules, even though there are no universal solutions to these issues.
Debts and Debt Collectors After Death
There are debt collectors out there that, sadly, prey on those who are grieving. Debt collectors often approach the family of a deceased person with demands for payment of the deceased person’s obligations or the offer to absorb the debt and take on the responsibility for its payment.
If this occurs, it could be because of an unpaid debt left by a departed loved one. A debt collector may be seeking to collect from you, but it’s possible that you’re exempt from the obligation.
Debt collectors have to follow a number of different state and federal rules that govern collections procedures whenever they pursue payment of an outstanding balance. A debt collector, for instance, is required by law to stop contacting you once you’ve provided written notice that you do not wish to receive any future communication from them.
A debt collector is in violation of debt collection laws if, after receiving your written warning to cease all communication, it continues to contact you, even to inform you that it has received your demand or that it intends to sue you.
But letters aren’t always sufficient. Even if you do everything by the book, some debt collectors may still be pushy, dishonest, and even criminal in their pursuit of payment.
You can submit a complaint with the FTC, the CFPB, or the attorney general in your state if you’re having problems with a collector. You can sue debt collectors for violating your rights even if you can’t prove a monetary loss as a result of their behavior.
The Probate and Debt
You or your loved one’s debts after death are regulated by a legal process called probate, which decides what happens to the debts and assets together termed an estate left behind by the decedent.
While the specifics of probate law vary widely from state to state, all of them set a general procedure that must be followed when an individual dies.
As an example, the probate process can be streamlined for minor estates with a value below a certain threshold in the vast majority of states. While this procedure is available in all 50 states, the minimum size of an estate to qualify varies widely from one to the next.
Oregon defines a modest estate as one with fewer than $75,000 in personal goods and fewer than $200,000 in real estate, while Missouri requires only $40,000.
There are three main aspects of the probate process related to the payment of a deceased person’s debts:
- The Estate is Unlocked. The process of opening a new probate case begins with the filing of a petition with the probate court after a person’s death. An administrator of an estate, sometimes known as an “executor” or “personal representative,” is appointed by the court to act as the legal custodian of the estate.
- Resolving Financial Obligations and Divvying Up the Heirs’ Share of the Estate. The administrator of an estate is responsible for settling the decedent’s financial obligations using estate monies. After all, debts have been paid, the administrator will give out inheritances.
- Putting an end to the Estate Administration process. Probate proceedings conclude when the administrator has satisfied all valid claims and distributed the remaining estate assets as inheritances.
The Guiding Principle is that your estate pays off your debts.
The court-appointed administrator of an estate is legally obligated to settle the decedent’s debts using estate funds. Even if they inherit from the estate, the deceased person’s loved ones are not responsible for repaying the debts incurred by the decedent out of their own personal assets.
The administrator is the only person who can legally sell assets and pay off obligations with money from the estate.
None of the decedent’s heirs, inheritors, children, friends, business partners, agents under prior powers of attorney, or anyone else who has not been granted authority to manage the estate by a probate court can be held liable for or utilize estate funds to pay off the decedent’s obligations.
Let’s imagine your uncle passes away and the court appoints you as the executor of the estate. The estate inventory reveals that your uncle left behind $1,250,000 in assets. You calculate the total amount of debt to be $250,000.
Assuming all claims are legitimate, the estate assets must be used to settle the claims, and only after the claims are satisfied can the remaining $1,000,000 be distributed as inheritances.
In some cases, more action may be required before the claims can be paid. If your uncle’s home is the main asset of his estate, for instance, you may need to sell it and collect the proceeds before you can refund the claims.
Indebted Estates
Assuming there are adequate assets, the administrator will pay off all debts incurred by the estate, relieving the surviving family members of any responsibility. The majority of disputes emerge when an estate does not have sufficient assets to pay off its debts.
An insolvent estate is one that has more liabilities than assets. Unfortunately, this means that certain bills will have to be unpaid. Once creditors realize they may not be repaid from the estate, they may try to collect from other parties, such as children or other relatives.
Even if an estate has enough money to pay its debts, creditors can still go after other people to collect on the debts incurred by the estate. This is especially true for joint debts.
Rules with Exceptions
There are a few scenarios in which you or a family member could be held liable for a deceased person’s debt:
1. Joint Debts
Debts held jointly by two or more people are owed in full by both the estate and the surviving debtor. For instance, many married couples share a credit card. Unlike an authorized user, both joint account holders are legally liable for any debt on the account.
Take the case of a credit card account held jointly by you and your spouse, but only one of you ever actually uses it.
After your husband passes away, the credit card company reaches you and demands that you pay off the outstanding balance of $10,000. You are still responsible for paying the bill even if you didn’t charge anything to the card or incur any fees.
There is a chance that your spouse’s inheritance will cover the outstanding balance, but this is not a guarantee. Since credit card debt is unsecured, it typically comes last when an estate is being settled.
Your spouse’s credit card debt might not get paid at all or only in part if the estate does not have enough money to pay off all of the debts incurred by your spouse. Joint debtors are legally responsible for all debts incurred by the business, and failure to do so may result in legal action by the credit card provider.
Moreover, creditors need not wait for the probate process to attempt collection. Even if there is enough money in the estate to cover the debt, the creditor can come after you for it because you are as responsible for it as the deceased borrower the joint account holder.
Likewise, a survivor is responsible for any accounts for which they were a co-signer or guarantor. Co-signers and guarantors are those who are jointly and severally liable for the repayment of a debt in the event of the borrower’s failure to make payments on that debt, but who are not themselves borrowers of the loan.
When a cosigner or guarantor passes away, the loan’s creditors can come after them for the whole outstanding sum. There are some debts, including federal student loans, that have death forgiveness clauses that release the co-signer from liability upon the death of the borrower. Such provisions are uncommon, for instance, among private student loans.
In other words, not everyone who uses a debt instrument is accountable for repaying it. In the event of the death of the primary account holder, the authorized user is not liable for the outstanding balance on the credit card or bank line of credit because they are not joint debtors.
Let’s pretend your husband applies for a credit card and adds you as an authorized user, but you’re the only one who ever uses the card.
If your spouse passes away and leaves a credit card amount of $10,000 and you used the card to make transactions, you are not responsible for paying off the sum because you were only listed as an authorized user and not the account holder.
2. The Community Property
However, in community property states, a spouse’s debts do not automatically pass to the surviving spouse upon death. Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin are the other nine states that follow the community property model.
In these jurisdictions, the surviving spouse may be held liable for the deceased spouse’s debts after their death depending on the division of assets. In a community property state, both spouses are equally responsible for paying off any obligations incurred during the marriage.
Thus, for instance, if one spouse obtains a credit card while married, the card is considered common property. Even if you never applied for or used the card yourself, you will be held responsible for paying off your spouse’s remaining balance if they pass away while carrying a balance.
If you live in a community property state, you may want to see a probate lawyer because the regulations regarding the treatment of debts after death vary from state to state.
3. The Filial Responsibility Laws
Filial liability rules are an unusual and potentially problematic exception to the general debt after death rule. Some states have passed laws that allow creditors to go after a deceased person’s family members to settle their medical debts if they are unable to do so.
These laws go by various names, including filial support and filial piety. These rules vary by state, but generally allow care facilities like nursing homes and assisted living facilities to sue surviving family members for the debts of deceased residents.
The existence of poor laws in England in the 16th century is credited with giving rise to the concept of familial responsibility laws, which have been in effect ever since. These regulations allowed creditors who were owed money by poor people to sue a spouse, parent, or other relative to recoup the loan.
While these statutes exist in 29 states, they have seen relatively little usage in the modern era. An appeals court in Pennsylvania, for instance, upheld a case in which an adult son of a woman who incurred $93,000 in medical debt was deemed legally accountable for repaying it.
Another instance saw a North Dakota judge determine that a nursing facility could file suit against the heirs of a deceased couple who had left behind over $104,000 in medical bills.
Alaska, Arkansas, California, Connecticut, Delaware, Georgia, Indiana, Iowa, Kentucky, Louisiana, Maryland, Massachusetts, Mississippi, Montana, Nevada, New Hampshire, New Jersey, North Carolina, North Dakota, Ohio, Oregon, Pennsylvania, Rhode Island, South Dakota, Tennessee, Utah, Vermont, Virginia, and West Virginia all have some form of filial responsibility law.
If you need information on potential liability, you should see an attorney because these laws vary widely from state to state.
4. Administration Error or Negligence
There is no requirement that a personal representative, administrator, or executor of an estate pay back any obligations incurred by the estate out of his or her own pocket. The administrator is responsible for administering the estate and disbursing lawful debts from estate funds, but the administrator is not personally liable for any of the debts.
As an added complication, probate administration and management of an estate can be a time-consuming and laborious endeavor. In most cases, the estate is responsible for compensating the administrator for his or her services.
It is possible, however, for an administrator to be held personally responsible for issues, costs, debts, or obligations incurred by the estate. A negligent or irresponsible administrator may be held financially responsible for any harm that results from their actions.
Take the case of your uncle’s inheritance, which consists of multiple rental properties and which you have been tasked with administering. During the course of settling the estate, it is your duty as an administrator to not only decide who will inherit the assets, but also oversee the care of those assets.
It may be necessary for you to cover any lost income, penalties, fees, or damages incurred as a result of improper property management, such as failing to collect rent, failing to use estate money to pay property taxes or utility bills on time, or any other kind of mismanagement.
Bottom Line
Although it is theoretically conceivable to inherit a deceased person’s financial obligations, in practice this rarely occurs. Instead, debt collectors typically aim to make you feel responsible for such debts.
Being inundated with letters from creditors and collectors at your time of mourning can feel overwhelming, and it’s easy to become confused and agree to settle a debt that isn’t your responsibility.
Talking to consumer law or probate attorney is usually a good idea if you’re feeling lost and need guidance in understanding your legal options, rights, and duties.
