When someone passes away, the debts incurred during his lifetime don't just disappear. Federal laws govern the process of the executor paying these debts out of the deceased person's estate. Learning about the process ahead of time can prevent relatives from falling prey to debt collectors during a vulnerable time of grief.
Relatives Are Not Personally Liable
The most important thing to remember when it comes to a deceased person's debt is that in most cases, the surviving relatives are not personally liable for the debt. Instead, the deceased person's estate is liable. Under the Fair Debt Collection Practices Act, creditors are not allowed to tell relatives they're personally liable. However, they are allowed to call to find out who is the executor of the estate. Although debt collectors often imply that relatives can pay the debt, this is never a requirement unless the relative is a co-signer on the debt or is the spouse of the deceased in a community property state. Even then, relatives should not make payments until the estate has paid out what it can.
Paid by Estate
Because the deceased person took out the debt, it must be paid from the estate the deceased person left. This occurs during the probate process, when the estate is settled and the executor pays all expenses, including funeral expenses and debts, before the heirs get anything. Laws govern which debts get paid first. In general, secured debts, such as mortgages and auto loans, are paid before unsecured debts, such as credit cards. In many cases, the asset that secures the debt must be sold to pay it off. If the heirs want to keep the asset in question, they can choose to personally pay off the debt instead. This is often the case with family homes that the children want to keep.
Written off by Creditors
In some situations, a deceased person's estate does not have enough money to pay off all of the debt. For example, say someone owned a home worth $150,000 but had a mortgage for $100,000, home equity loan for $30,000, and credit card debt for $35,000. If the person passed away with no other assets, the estate would be insolvent. This means that the assets are not enough to pay off all of the debt. In this situation, laws govern which creditors get paid first, and the other creditors end up having to write off the remaining debt. Retirement accounts and life insurance policies are handled outside of the estate, so these cannot be used to pay debts in an insolvent estate.
Paid by Co-Signer or Surviving Spouse
As mentioned earlier, surviving spouses in community property states and co-signers are the exceptions to the rule that the estate is liable for the debt. If the debt had a co-signer, this is a joint debt, and the creditor can legally pursue the co-signer for repayment. The estate still may pay that debt, but if the estate doesn't have enough funds to pay it in full, the co-signer is legally liable for the remainder. This is a risk the co-signer took on when signing the initial loan agreement. In addition, in states such as California that have community property laws, all debt taken out during a marriage is treated as if the surviving spouse co-signed it. Therefore, the surviving spouse is held personally responsible to repay it.
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