1/16/2012 7:40 PM ET|
Buried by a dead relative's debt?
Even after death, debts need to be paid, and how that's done can be a complicated affair, depending on the deceased's estate.
Death is a fact of life, and when someone dies, the deceased's family naturally may wonder what will happen to his or her mortgage, auto loan, credit card bills, unpaid income taxes and other debts.
The simple answer is that debts become part of the deceased's estate and typically should be paid before the remaining assets are distributed to the heirs.
Beyond that, debts after death are a very complicated subject, best approached with professional help, says Martin Shenkman, an estate and tax planning attorney in Paramus, N.J.
"When somebody dies, the executor or personal representative -- different lingo is used depending on which state you're in -- is charged with marshaling the assets for the estate and paying all the debts." Shenkman says.
Exactly how debts should be paid depends on the nature of the debt, the terms of the deceased's will and state law. For example, a loan collateralized by an asset usually stays with the asset, which means someone who inherits a house might get a mortgage as well. Someone who receives a car might get an auto loan to go with it. However, sometimes a debt may be paid off by the estate.
Executors and heirs also need to consider the possibility of hidden debts. To find out about undisclosed loans -- or to ensure there aren't any -- an executor can monitor the deceased's mail, search for P.O. boxes in the local area, review recent bank statements and speak with the deceased's financial advisers, Shenkman says.
Credit card bills can be among the easiest debts to resolve, unless the estate is insolvent. That's because credit card companies may reduce or stop the accumulation of interest and fees on an account once they're notified of a death. They might even, as Shenkman says, "accept a flat payment and call it a day," since they know resolving an estate can take months.
Debts also can come to light when a legal notice is published, as required by law in most states, says Michael Halloran, a wealth management adviser at Estate Strategies Group in Jacksonville, Fla.
"Before the estate can go through the court system, you have to publish, 'Mike Halloran died, and I'm the executor or personal representative of the estate, and if we owe you anything, you need to tell me,'" Halloran says.
Creditors usually have a 60- or 90-day period in which to respond to a notice.
Jointly owned assets
Debts after death can become even more complicated if the deceased owned a business or guaranteed or co-signed someone else's loan, Shenkman says. The estate may be responsible for such debts, depending on the ownership structure of the business and the legal wording of any loan guarantees. Again, legal advice is a wise investment.
Another complication is that some assets may be shielded from certain creditors. For example in Florida, a life insurance policy is safe from most creditors, Halloran says. In other states, no assets are protected. Again, the word "may" should be emphasized due to differing state laws.
Assets transferred through joint ownership or community property generally don't escape the rules, though collection may be more difficult for creditors in some cases. In other cases, the asset may simply be repossessed.
"Say I own a car jointly with Sue, and I die," Halloran says. "If the bank has the collateral on the car, they can say, 'Sue, you have a choice. Mike died, but if you don't pay us, we are taking the car back.'"
Not enough money
If an estate is insolvent, meaning the assets aren't enough to pay off the debts and the bequests in the will, the executor must sort out some tricky and sensitive matters. Shenkman says he's seen an increase in such situations because of the poor economy.
"If there is insufficient money to pay off all the debts being claimed, you need to know legally what the priorities are of who gets paid or who doesn't," he says.
Such situations can get ugly, because people may be grieving over the death of the relative.
"When someone dies, it's a very emotionally charged event for the family and loved ones. When you combine that with the potential of not getting an inheritance but instead having to deal with debt, you're really talking about a hypercharged situation," Shenkman says.
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Both of my parents died in the past 6 years... and their estate was insolvent. As dad died from cancer and mom from alzheimer's their illnesses and related expenses took all of their income in the last years of their life. They died with a fair amount of combined credit card debt... approx $24,000. My brother, sister, and I didn't know about it at all... I got a phone call one day from Bank of America, a company I have some investments and financial dealings with... they told me that I was responsible for my father's credit card debt, and that my credit rating could be affected if I didn't pay the debt. I IMMEDIATELY got the persons name, and asked if the conversation was being recorded... when they said yes, I said GOOD. I then explained that, my parents estate was insolvent.. ie they were broke... that MY name was NEVER attached or involved on ANY financial instrument signed for or in my parents name and that furthermore.. ANY attempt to collect these debts or even CONTACT me in ragrds to them ESPECIALLY in a threatening nature ( when they told my my credit rating could be effected it is a threat) that they would hear from my attorney and legal action would be forthcoming.
They were 100% in violation of privacy act laws and have ZERO right to attach ot attempt to collect ANY debt that my name was not part of. Death of a parent does NOT make you financially liable for their debt.. UNLESS your name appears on the credit card or loan papers etc....
DO NOT fall victim to these companies that prey on people's ignorance of the law in these matters!
I am currently negotiating a financial settlement with BOA for their violtion of privacy laws and actions in my case.
DO your homework people!!
Been there, done that! I knew someone who died with massive credit card debt. The creditors came after her husband, but he wasn't falling for it.
"Get lost!" he told them. "I NEVER co-signed for any of her cards, so don't come crying to ME! You're outta luck, chump!"
Seems to me like you can't be truly free in America unless you are debt free.
I was the executor of an estate laden with debt ten years ago. I hired an attorney to handle the legal aspects of the probate and found out my attorney, who charged me $275 an hour, had ZERO CLUE of the laws of the estate. I started doing research on it and discovered that unsecured debt cannot become a lien on the property. Medical expenses, coroners fees, and funeral costs CAN, but not unsecured debt. I also discovered that one can withdraw $10k from the estate BEFORE the creditors are paid, and any account listing a beneficiary is excluded from probate, as well.
I even discovered that my mother-in-law, who passed away just one year after my father-in-law passed, had never gone through probate for his case. She also did not receive the funeral bill. WE received it on the day of HER funeral (tacky, tacky, tacky..."By the way, your mother never paid this bill.") Except we did some research and saw copies of letters from her to the funeral asking for the bill, and they never responded until after her death. I did research on THAT one and discovered that her estate was now exempted from paying for HIS funeral, because it was pooled with the rest of the unsecured credit. Had they billed her when she asked, she would have owed it. She accepted responsibility for those charges.
A year after she died, we started getting threatening letters from the funeral home, indicating my husband was the liable party. I told them I was the personal representative, and I needed to see his signature accepting that responsibility. They tried lying to me, indicating the laws protected them. I quoted them statute telling them they were fecally loaded, and if they ever threatened my husband's credit again, I'd make sure the next thing they buried would be their business.
DO your own homework. Attorneys are lazy and want the money for nothing but mass form production.
Old Man 76 I agree completely with what you just said. Almost no one saves for anything anymore. They want it now and whatever it is soon becomes not as important as they thought it was, but the debt goes on. Credit cards are the downfall of many people, but that is not the fault of the banks, it is the fault of the consumer. People get in over their heads and instead of taking ownership of their own failures, they want to blame it on the big evil bank for giving them what they asked for.
As far as being an ornery old man...more power to you. You have earned the right to be independant.
The debts have to be repaid up to the total value of the estate.
So if someone owes $100,000, but upon liquidation of all property they only have $90,000 - then their is no inheritance, but the debt doesn't get passed on either.
It's not really that complicated. The executor has to figure out all the debts and all the assets.
If there is more than enough, they have to try to stay with the will. If there isn't - usually they liquidate everything and then divide the remaining proceeds.
Best thing you can do is to get debt free.
Unless you are borrowing money for the purchase of something with a return that exceeds the interest you will pay out, then just save up your money and buy with cash. If you can't save the money, then you wouldn't be able to make the payments on the loan anyway.
I happen to have a differing view since my father in law died.He left nothing but bills, we had to pay out of pocket for his funeral expenses despite the fact that he had 4 other children. He was 22 years in the Navy retired, but had no insurance, no pension and no social security. He and my husband had the same first and last name, different middle names. All the companies we provided death certificates to had to have a certified copy (at $10 a piece) and then proceeded to transfer the debts to my husband and I. I've spent countless hours trying to get this crap off our credit records and every 6 months they "update" their systems to show it as our debt again. They continue to call me 10 years after his death wanting me to pay these debts and are obnoxious enough that they tell me stuff like "you don't want this on his credit history do you?". I don't care, he's dead and more importantly I don't think he cares either. This article has the worst "advice" I've seen!
14z....sorry that your Mom was asked by people that she borrowed money from, to be repaid. The nerve of them. I hope you never loan anyone anything, that might make you a criminal if they should happen to die when you ask for it back.
Does everyone on here think it's right to borrow money and not pay it back? That sounds like fraud to me.
@Busted in America27,
I think you and many of the other posters here are confusing two different issues. The fact is that the debts of the deceased person represent a legal claim only against their estate. Creditors have no claim at all against anyone else (even close family members), with the noted exception of an executor/personal rep. that mismanages the estate.
This is being confused with an earlier article highlighting the unethical practice that some unscrupulous debt collectors are employing to pressure people into paying for debts of deceased family members that they're not responsible for, by dishonestly claiming that they are. If you get a call like that, simply refer them to the executor/personal rep handling the estate. That's what they're there for.
Nobody can make you pay their(descendants) debts after they die. That is big brother scaring everybody......
Nope, doesn't work that way. All creditors must be informed of the estate. The creditors in turn can only file a claim against the assets of the estate. All estate assets, except for creditor protected assets, such as life insurance, and annuities (at least with beneficiaries other than the estate itself), qualified retirement plan assets, and in some states, homesteaded real estate are to be identified, inventoried and when necessary, liquidated to satisfy estate debts. Each state has a pecking order of which debts are to be paid first. If the estate does not have sufficient assets to cover all the debts, then and only then do the remaining creditors get nothing.
OK, here's where Free_Health_..'s advise goes awry. If the creditor is not informed of the estate, or even worse, is intentionally misinformed about it. They will have been denied at the very least an opportunity to attempt to collect on their legal claim and can then hold the executor/person representative PERSONALLY responsible for the debt. You will have effectively turned an uncollectable estate debt into your own personal debt. Maybe it's just me, but that doesn't sound like a very smart move.
"I've gone through several family member deaths & have never seen it."
My guess is, that you weren't the executor, or else your legal counsel would have informed you of your legal responsibilities and consequences of a breach of duty.
The key to not having debt when you die is simple. Don't have any debt ever. I don't, and my kids won't have anything to deal with when I die. There is no estate, but no debt either. Very simple.
So because my (pick a relative) was an idiot with money and left more debt than cash to pay for it all I am responsible for it? I don't think so and no lawyer-ing or suck up morality **** from shills like you is going to make me pay for it.
IF YOU LEND MONEY to anyone them DYING is an inherent risk. If you don't want the risk DON'T LEND MONEY. Creditor's want to make money and have NO RISK anymore. Well **** them and to bad.
What are they going to do about it? That's right nothing. People fail to realize that. What is a debtor going to do about it? That's right .....nothing. Run their mouth - make you scared - make you think you HAVE to pay. If it isn't TAXES = you don't have to pay ****. They are going to get a judgment they say? For what? And if you are really that scared over it it is so easy to make yourself Judgment proof it's pathetic.
Fine I am Immoral. You win. I am also not in debt to anyone and have 0 stress :) Have a nice a day.
I've always wondered, if no one from the family ever signed any contract with these credit card companies that the deceased used, how they could be held liable for the debt? If they never signed a contract, then the card company can eat the debt.
If the decedent has no estate to recover against (and there is no cosigner), the unsecured debt will be eaten by the debt holder. If there is a (sufficient) estate, the unsecured debt will be satisfied out of the estate, before the estate is parceled out to the heirs.
Debt creates a great deal of confusion on the part of survivors. There are those who are owed money from dead folks who will resort to less than scrupulous methods to get paid. Some will threaten the credit score of survivors. Debt collectors cannot attack the credit rating for survivors if they are unrelated to the debt.
Unless the debt is joint or there is a guarantor involved, survivors cannot be held personally liable for the deceased debts. However, if the debt is attached (collateralized) as in a mortgage or car loan, the lienholder can require payment or assumption of the debt before they release the lien. With a mortgage for example, the bank will allow a survivor to a) assume the mortgage; b) sell the home, pay the mortgage and allow the survivor to keep the proceeds; c) refi the mortgage into the survivor's name.
As for unsecured credit cards, the best the card company can hope for is to be paid as part of the settlement of the estate. If there are no assets left, the card company gets nothing.
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