You have just lost a loved one. Then, you get a phone call from one of their creditors. This will very likely and very understandably catch you off guard. Why would a creditor of a deceased family member be contacting you regarding payment of an outstanding debt? Do you really have to pay? Understanding what happens to debt after someone dies can protect you from being taken advantage of financially in the wake of losing a loved one.
First, consider what happens during the probate administration proceedings. Regarding any unpaid debts of the deceased, all creditors are provided with formal notice so that they can make a claim against the estate to collect any outstanding debts of the deceased. All debts that can be covered by assets in the estate will be paid. Some assets will be exempts from being used to pay off debts, but most are fair game. In a perfect world, all debts would be covered and paid off. Medical bills and credit card debt would be satisfied by assets of the estate. However, sometimes there is just not enough money in the estate to cover all outstanding debts.
When an estate cannot cover all debts owed by the deceased, most commonly, creditors will have to cut their losses and walk away. Oftentimes, there is no other legal way for the creditor to recover the debt once the assets of the estate have been exhausted. In some instances, surviving heirs, family members, and others may be liable to cover unpaid debts incurred by the deceased. The circumstances where this happens are very limited and include:
- Failure of the executor of the estate to properly put creditors on notice, violating probate laws;
- When an individual co-signed for a debt obligation with the deceased;
- When a surviving spouse signed a legal agreement to assume the debt and be held liable for the debt of the deceased spouse; and
- If someone else jointly held an account with the deceased.
Absent any of the above circumstances, it is likely that surviving loved ones will not be responsible for paying off outstanding debts of the deceased. This means that any phone calls you receive from debt collectors contacting you about payment of a debt the deceased incurred, are most likely predatory and trying to make you pay for an obligation that is not yours. In fact, under the Fair Debts Collection Practices Act (FDCPA), surviving family members are protecting from these types of abusive and deceptive collection practices.
The probate administration process is complicated. Debt collection practices are complicated and often intimidating. Be sure to know your rights so that you are not taken advantage of. Debt collectors with no other options will try some pretty outrageous things to try and collect money due. Always be aware of your legal obligations to pay or not pay a debt, especially if it was a debt incurred by someone else.
Should your loved one have a trust, a different process takes place. We will discuss that in our next newsletter.
Roy Schneider’s areas of practice include business planning, entity formation, mergers, acquisitions and sales of businesses, employment law, contracts, transactional matters of all kinds, real estate transactions, homeowners associations, non-profit law and estate planning.