In addition to family and friends, almost everyone is survived by his or her debts when they die. In my practice I have seen many people, especially seniors, who live by the “cash and carry” mentality – they never live beyond their means and pay for everything with cash. The debt they accumulate is usually common everyday bills for household utilities. On the other hand, I have seen many people leave large amounts of debt for their heirs and beneficiaries to contend with after they die. The debts might include mountains of unsecured credit card balances, back taxes owed to the IRS, medical expenses not covered by insurance, and/or mortgages on property they own.
Not all debt is the same. A distinction must be made between unsecured debt and secured debt. The latter is an obligation secured by a tangible asset, for example a mortgage on a house. Everything else falls into the unsecured debt category. The type of debt and the process used to distribute the deceased person’s assets determines how the debt is dealt with.
If there is a pay-on-death beneficiary designation for assets such as life insurance, bank accounts, or retirement assets, the proceeds of the account will go directly to the beneficiary and an unsecured creditor cannot collect the proceeds. However, for assets that stand in the deceased person’s name with no beneficiary designation, those assets can be reached by an unsecured creditor.
Secured creditors fare much better. If mortgage payments fall behind the mortgage holder can foreclose on the mortgage and regain the property. The same is true for repossession of vehicles still being paid for on credit. Heirs and beneficiaries will have to make the tough decision as to whether to try to pay off the balance due and keep the property or sell it. When there is little equity in the property compared to the debt, there is usually no choice except to sell. This is especially true for homes subject to a reverse mortgage.
If the deceased person’s estate must go through probate, the law requires that notice of the proceeding be given to all known and readily ascertainable creditors of the decedent by the personal representative of the deceased person’s estate. The creditor is given the opportunity to present its claim and the personal representative must either pay the claim in full, negotiate a settlement or reject it. During probate the law also requires that other potential claimants be notified of their right to pursue a claim such as the Department of Health Services (for reimbursement of Medi-Cal payments) and the Franchise Tax Board (for back taxes owed the State of California). A creditor even has the right to initiate a probate proceeding to collect on a debt!
The good news is that in most cases the heirs and beneficiaries are not personally liable for the debts of the deceased person. The exception is the surviving spouse – he or she may be liable for the deceased spouses’ debts depending on the type of debt. I always caution people handling a deceased person’s estate not to pay off all creditors at the outset. It is possible that some of the unsecured debts will “go away”, especially if the one-year statute of limitations on debt collection has expired.
© 2022 by Marlene S. Cooper. All rights reserved. (You may obtain further information at the website www.marlenecooperlaw.com, by email at MarleneCooperLaw@gmail.com, by phone at (626) 791-7530 or toll free at (866) 702-7600. The information in this article is of a general nature and not intended as legal advice. Seek the advice of an attorney before acting or relying upon any information in this article).