The Process of Settling Debt After Death
Who will handle everything?
When someone passes away testate (having made a will before death), an executor is specified in the will who shall carry out the instructions of the will. If, on the other hand, a person dies intestate (without a will), the probate court assigns a personal representative to the estate. The personal representative is charged with managing the affairs of the estate as they see fit – with one caveat. Because the executor/personal representative assumes a fiduciary role to the estate’s beneficiaries/heirs, they are obligated to act in the best financial interests of the estate.
The Probate Process:
The first matter of business (aside from filing documents with the probate court) for an executor is to inform all creditors and any current service providers of the estate holder’s death. This is so that any persons who may have an interest in the estate can file a claim against it within the allotted time period.
The executor will then need to take inventory of the estate property – both real and personal – to determine its value before settling debt still owed to creditors. Note that some assets aren’t considered part of the probate estate and instead may pass automatically to a named beneficiary upon death. Examples of non-probate assets include IRAs, 401(k)s, brokerage accounts and insurance. When determining which creditors to pay first, the executor will look to such things as whether or not the creditor has a claim on the estate’s collateral (secured debt). Only when all of the debts and taxes have been paid however, can anything be legally distributed to the beneficiaries.
Finally, the executor can distribute the remaining estate property among the beneficiaries. In the absence of a will, the laws of the state will determine how the remaining property is distributed amongst heirs. Ideally, both creditors and the estate’s beneficiaries/heirs will be satisfied with the end result. But this, of course, is not always the case.
What if the estate’s assets can’t cover all the bills?
Sometimes, an estate doesn’t meet the monetary obligations of its creditors and claims from its beneficiaries. In such instances, the estate is said to be insolvent, and is subject to abatement statutes. Typically, these statutes require that claims and debts of the estates be paid in the following order:
• Reasonable funeral expenses
• Costs and expenses of administration (of estate)
• Debts and taxes with preference under federal law or the laws of the State
• Reasonable medical and hospital expenses of the last illness of the decedent
• Judgments entered against the decedent according to their priorities
• All other claims
Once the estate’s assets have been depleted, any remaining debt after death are discharged (written off). With a few exceptions discussed below, creditors cannot collect from heirs or family members.
• If a family member was a joint account holder, he/she will still be liable to the creditor for the remaining balance on that account. If however, you were merely an authorized user with charging privileges, you may not be held liable for the remaining debt.
• Likewise, if a family member was a co-signer on a loan, he/she will still be liable for the remaining balance of the loan. (This doesn’t mean that the creditors won’t try and come after you, unfortunately.)
• If you live in a community property state – in community property states, everything acquired during marriage is considered joint property, including debts. Thus if you are married in a community property state and your spouse dies, you may be entirely responsible for whatever debt accrued during the marriage. Any pre-marriage debt is considered separate property and you cannot be held responsible for.
If the estate has debts that exceed its assets or debts that are questionable, an attorney negotiated debt settlement may be the solution. Our attorneys can negotiate large reductions in debt, without bankruptcy. We offer a free consultation with a debt settlement lawyer. This article is not intended to confer specific legal advice, but rather to provide some general information to help guide you through the process. If you have any questions, or would like to speak to an experienced debt settlement attorney, contact our law firm today for a free consultation.