Rather than coming into a windfall inheritance, many families are faced with settling a mountain of debt when a relative passes away. Whether or not the family is responsible to pay depends upon the type of debts and the type of assets involved.
Loans on real estate or cars are secured by a lien on the title. If the debt is not paid, the lien holder is entitled to foreclose on the house or repossess the car. If the value of the asset exceeds the amount of the debt, the asset should be sold to pay off the debt or someone in the family may want to inherit the asset while assuming the debt. If the debt is more than the asset is worth, the excess debt is unsecured but still due. It may be wise to abandon or surrender the asset especially if there are not other assets available to pay off the unsecured portion of the debt.
Certain loans, such as federally subsidized student loans or loans covered by credit life insurance, are not collectible after death. Other unsecured debt is collectible from the decedent’s probate estate. There are two situations in which relatives may be responsible for the debts of the decedent:
- Co-signer– The co-signer on a loan or joint holder of a credit card account will remain responsible upon the death of the debtor.
- Spouse– In Ohio, a spouse is responsible to pay for “necessities” provided to their deceased husband or wife.
The probate court oversees the transfer of any assets held in the decedent’s name alone. It is the job of the executor or administrator to gather together the assets, pay the debts and then distribute the balance to the beneficiaries of the probate estate.
When the fiduciary receives a bill, he either accepts it or rejects it. If he rejects it, the creditor can file his claim with the court. Creditors of the probate estate have six months from the date of death to file their claims. If there is any doubt as to whether all bills can be paid, then nothing should be paid until all bills are received.
If the debts of the probate estate exceed the assets, the estate is insolvent. The executor reports the insolvency to the court and requests a hearing to determine which debts should be paid and which debts should not. All of the creditors are notified of the hearing. The law prescribes which creditors get paid according to their classification. Costs of administering the estate such as court costs, attorney fees and fiduciary fees are paid first. Then allowances for support of the spouse and minor children, funeral and burial costs, taxes and on down the line. General unsecured debts such as credit card bills are last. The court will allow full payment of claims by order of class priority until no money remains to distribute. The creditors in the last class to get paid get only partial payment. The remaining creditors will not get paid at all and their debts are discharged. This process is similar to a bankruptcy.
Certain assets are passed to beneficiaries outside of the probate estate and are thus not subject to creditors claims:
- Joint Assets– Assets held jointly with right of survivorship pass directly to the survivor. Unless the asset has a secured debt (a mortgage or lien) attached to it the survivor is not responsible to pay debts.
- Assets with a Designated Beneficiary– Many assets pass directly to a named beneficiary without going through the probate estate. These can include life insurance, annuities, retirement accounts, “payable on death” bank accounts and assets that are held “transfer on death” such as houses, cars or brokerage accounts. If, however, the named beneficiary is deceased or no beneficiary is named, the asset could end up in the decedant’s probate estate and subject to creditor claims.
The State of Ohio seeks reimbursement for Medicaid expenses paid for individuals over the age of fifty-five or those of any age who were institutionalized in a nursing home or other facility. Both probate and non-probate property may be subject to Medicaid Recovery in Ohio. These debts are collected by the Attorney General’s Office.
What to Do
The Fair Debt Collection Practices Act makes it illegal for collection agencies (but not the creditors themselves) to misrepresent debts by saying you are personally responsible or that not paying the debt will affect your credit rating.
- When dealing with debt collectors keep careful notes. Write down the caller’s name and company as well as the time and date of each call and details of your conversation.
- Request that the lender or collection agency contact you in writing. This cuts down on multiple phone calls and gives you time to investigate the claims. Keep a copy of each bill or claim received.
- Do not try to go it alone. Hire a competent attorney to help you through these difficult, complex and stressful transactions.