What Happens to Your Debt When You Pass Away?
Debt does not disappear when someone passes away. In fact, in some instances, children may be on the hook for their parent’s debt after death. The laws are very different in each state, so as usual, this blog is only going to cover California residents.
When someone passes away, their debt is then transferred to the estate and is known as the estate’s debt. It will not automatically pass to another person unless it is shared debt, such as a joint account.
Debt of an Unmarried Person
In the event that an unmarried person passes away, in most cases no other person will be liable for their debt. However, there are exceptions. If that person had joint credit cards, mortgages, or otherwise jointly owned the item being collected on, the other person(s) are liable for the debt.
Let’s assume a person passes away without joint ownership in anything that is considered a debt, what happens? It depends on the person’s estate plan.
If the person had a will-based estate plan, or did not have an estate plan and owned enough to qualify for probate, a probate case will be opened. As part of the probate process, all creditors shall be notified of the person’s death and have either 4 months from the date of the probate filing or until 1 year after the person’s death to file documents with the court in order to attempt to collect their debt.
In another scenario, let’s say the person who passed had a trust-based plan and did not qualify for probate. The creditor has 1 year from the person’s date of death to file a debt collection request in probate court, even if a case has not been opened, to attempt to collect the debt.
As a family member or friend, assuming you are not the person assigned to administer the probate process, you have no duty to notify your loved one’s creditors of their passing. You have no duty to respond to them either (again if you are not a joint account holder), even if they send you letters and threaten legal action. Until they file a claim in probate court, you can ignore them. It is their burden to file that claim and collect the debt.
Debt of a Married Person
If a married person passes away, the scenario is much different than the above scenario. California is a community property state. That means that any money earned, property purchased, and debt accrued DURING the marriage is community property with a few small exceptions.
Let’s say your spouse passes away and there is a joint credit card in both of your names. You are automatically liable for that debt. It does not matter if you were unaware that your spouse spent the money on the card, or if you never paid the bills before; you are liable and must repay the debt.
In another scenario, imagine your spouse had a separate credit card that was used during marriage, the creditors have the right to go after your community property to pay that debt. As mentioned above, if a probate case needed to be opened, they will be notified and have to reply in the same way as above. However, if a probate case did not need to be opened, the creditor will likely start to notify you directly of repayment. Unless your name is on the account, you do not have to respond to them unless they file a request for repayment in probate court.
If the creditor does not file the appropriate paperwork in probate court by either deadline, they have lost their ability to collect that debt.
What about the separate property of a married person?
Separate property is obtained in a few ways. First, if it was owned prior to the marriage, or acquired during the marriage and a legal document was filled out noting that it is separate property. In addition, if someone is gifted something such as real estate or vehicles, etc., that is a married person’s separate property. BEWARE: If you are gifted something that requires payments, and payments are made from your earnings while married, it will then be considered community property to an extent. If you are unclear what is your separate or community property, contact me and we can discuss it.
A married person’s separate debt who (from prior to marriage and was not paid for with community property funds), will be treated in the same way as a single person’s debt. An example of this would be something financed with money from a trust, or gifted money. In that case, the creditor would not go after community property and instead after the separate property to pay for it.
Debt of a Single Parent
Here, credit card debt is not of concern; medical care for end of life treatment is the typical culprit. MOST OF THE TIME, a person’s child will not be liable. If this happens to you, contact a probate attorney for assistance.
California’s laws regarding filial responsibility (meaning from the daughter or son) are conflicting. The result is that courts do not enforce the law that states a child with means to do so must provide care for their aging parents because there is another law that says it is illegal to hold a relative responsible for the same type of thing.
An exception would be if a child signs a contract to pay the debt, for example if you signed documents cosigning for a parent or documents agreeing to pay a nursing home, etc.
A good thing to note here is, a creditor should not contact you to pay your parent’s debt if you are not the executor of the estate. They may contact you to get the information about the executor, but not repeatedly. The Fair Debt Collection Practices Act (FDCPA) protects you from harassment from creditors.
What to Do if a Creditor Files a Claim?
If there is not an existing probate case and a creditor files a claim, it is best to hire a probate attorney to represent you and the estate. More often than not, the debt can be settled for less than the entire amount.
If there is a probate case already, the debt will be assessed by the Judge, and if it is legitimate, will be paid by the estate. This means that children and other heirs will often times receive less if there are high debts to be paid. It may be worth it to have a probate attorney negotiate a lower payment.
What Can You Do to Prevent This?
Ensure that you and your loved ones have estate plans that avoid probate. That is a trust-based plan if the person has assets in excess of $166,250.00. Otherwise, all potential creditors will be notified. If probate is avoided, the burden is on the creditors to collect in court by the deadline.
In addition, ensure all of your debts and debts owed to you and your loved ones are recorded either in a file or somewhere made known to your closest family members so that there will be no surprises. This is where record keeping responsibilities are of upmost importance; if you have proof that you have paid everything, then your trustee or estate administrator can defend incorrect collection attempts.
If you would like to discuss this further or to have a FREE 30 MINUTE CONSULTATION regarding an estate plan, please contact me.
