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Deceased Debt

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Myths about Deceased Debt

There are several misconceptions about debts of recently deceased individuals including: whether the debts need to be paid, how they’re paid and who is responsible. Read on to clarify any misconceptions and to understand your responsibilities.

MYTH:  When someone dies, their debts are erased.

FACT:  This is a very common misconception. The thought is that if the person is no longer alive, they cannot be responsible for their debt. This is not entirely true. If possible, all debts will be paid via the Deceased’s estate during formal or informal probate proceedings.

Debts of an Estate in Probate: The creditors of the Deceased have the right to file a claim in the estate proceeding in order to recover funds owed to them.  The timing of when a creditor needs to present their claim varies by state, but if a creditor makes a claim within the state’s legal time constraints, the claim must be paid if there are sufficient assets to pay creditors of their class when probate proceedings come to an end. Please note: The personal representative does have the right to dispute the claim of the creditor.

Debts of an Estate not in Probate: When there is not a formal probated estate but assets exist, the creditors can work with the surviving family to understand what assets are available to repay the Deceased’s debt obligations. The creditor or their representatives should always approach the family in a respectful and empathic way to develop a plan for repayment.

MYTH:  When someone dies, the Deceased's debts are transferred.

FACT:  Many people also think that if someone dies, their debts are then transferred to the next of kin or even the personal representative. Unless an account was held jointly, such as a mortgage, the debt does not transfer to a survivor. The creditor can file a claim for debts owed by the Deceased during probate proceedings, but the debts do not get transferred if the estate is unable to pay the claim or if a creditor fails to make a claim.

MYTH:  Creditors can always try to get money.

FACT: People often think that creditors are allowed to request payment from the estate at any time. This is also not true. If the personal representative follows the probate proceedings correctly in providing notice of death, the creditors have a specific window of time in which to file a claim on the estate. The statute of limitations in which to file a claim varies by state, so consult your probate attorney or state probate code for more information.

MYTH:  Family comes first when distributing the estate.

FACT:  In probate proceedings, there is an order in which distributions are to be made.  Debts and obligations are classified based on their nature, and given a priority based on their class.  The classification of debts and order of priority are outlined in the estate and probate statutes of every state.   Generally, any available spousal/family allowances and exemptions come before most other distributions; however, general distribution to heirs typically occurs after all other estate debts (including funeral, attorney fees, creditor claims) are paid.  

MYTH:  If debts outweigh assets, the personal representative won’t be paid.

FACT:  If the estate is not large enough to pay all of the claims, there is another order of priority in which assets are distributed. 

1. The costs and expenses of the administration of the estate, the personal representative, filing fees, attorney’s fees, etc.

2.   Exempt property, family and homestead allowances

3.  Funeral expenses, which generally must be considered “reasonable;” if expenses seem unrealistic, the court might investigate

4.  Taxes and debts with preference under federal law

5.  Medical expenses of the last illness––as long as they are “reasonable and necessary”

6.  State taxes and debts with preference under state laws

7.  All other claimants including creditors 

* This list is representative; be sure to review the laws of your state for the order of payment in your state.

 

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