Who Is Responsible for Debt After Death of a Relative?

A 2016 study by Experian, one of the three largest credit bureaus in the U.S., determined that most Americans – 73% to be exact – are going to die in debt.

The good news for relatives of the deceased is that while you can’t take money with you … you can take debt to the grave.

Relatives are not responsible for the deceased member’s debt, unless they co-signed for a loan, credit card, have joint ownership of a property or business or live in one of the nine community property states.

The rest of the debt obligations fall to the deceased person’s estate (if there is one), and that is where the situation can get a little muddy, especially for relatives who think they are in line for an inheritance. There can only be an inheritance if there are enough assets in the estate to pay off the deceased person’s debts.

The Federal Trade Commission maintains a straightforward guide on its website regarding the rights and responsibilities of surviving family members.

As the FTC points out, a general set of standards called the Fair Debt Collection Practices Act applies to this situation. The FTC guide shows that, apart from some specific instances involving co-ownership of assets and debt, surviving family members usually don’t have to pay the debts of someone in their family who has died.

However, the debt won’t simply dissolve into thin air. When a person dies, their assets transfer to their estate.

Estates, Executors, and the Probate Process

In most cases, existing debts are paid from the deceased’s estate. An estate is the sum of the individual’s assets. Those could include things like a home, a car, a boat, a stamp collection, jewelry, a bank account – just about anything that is money or could be turned into money by selling it.

If someone dies with outstanding debt owed, the assets in an estate are sold, and the money is used to pay off those debts. Requests for payment go to the person in charge of the estate, either an attorney or an executor named explicitly in the deceased’s will. The executor is responsible for paying the debts out of the estate.

Probate is the legal process that formally appoints an executor to administer an estate and distribute assets to beneficiaries and creditors.

Here is a general outline of how the probate process works:

• Contacting the appropriate office (may vary by county or state): Present the will or death certificate to the county clerk.
• Appointing an administrator or executor: The county clerk swears in the executor appointed in the will. If there is no executor, the person’s heirs can apply to be appointed executor. Preference goes to the surviving spouse.
• Apprising the estate: The executor will take inventory of all the person’s assets. This process can range from days to months, depending on the size of the estate.
• Settling claims from creditors: The executor must give notice of the person’s death, usually by publishing in a newspaper or sending letters directly to creditors. Timeframes vary by state, but creditors generally have three to six months to make claims to be paid. The executor is also responsible for filing tax returns and paying tax bills, including state and federal income tax, estate tax, and inheritance tax.
• Distributing property/Closing the estate: After paying debts/taxes and settling any disputes, the executor can distribute the remaining property to beneficiaries and close the estate.

Cases Where Family Members May Have to Pay

Relatives typically won’t have to worry about paying off a family member’s debts. There are a few exceptions to this, which we detail below.

• Debts in which the surviving relative is a joint account owner: Broadly speaking, if the account has what is termed the “right of survivorship,” all the funds pass directly to the surviving owner. If not, the share of the account belonging to the deceased owner is distributed through his or her estate, according to the Consumer Financial Protection Bureau (CFPB).
• Debts the surviving relative was a co-signer: One of the most apparent situations in which you may have to pay a dead relative’s debt involves co-signing. If you have ever cosigned a loan or other credit for that person, you may have financial responsibility.
• Spouses who live in community property states: In certain states, spouses are responsible for each other’s debt acquired during the marriage. If one spouse dies, the other spouse has to pay any debt (gambling, medical, etc.) the deceased acquired while married. However, debts acquired by the deceased spouse before marriage do not fall to the surviving spouse or any relatives.
• Community property states: These include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.

Beneficiaries may have to assume a dead relative’s loan if they receive the asset attached to the loan. For example, if you inherit the deceased person’s home or car – and there is still a loan out on it – you inherit that loan, too.

Other examples of debts that relative may have to pay include:

• Debts in which the surviving relative is a joint account owner.
• Debts a surviving relative co-signed the loan for.
• Spouses who live in community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin).
• Relatives who are responsible for resolving the estate and don’t follow particular state probate laws.

Types of Debt That May Be Inherited

Under certain circumstances, debts can be passed on after a borrower dies. In certain states, spouses may inherit the deceased’s debts, and nationwide, joint account holders may still be responsible for the debt after a person dies. Note that If you were an authorized user on a credit card account belonging to the person who died, that does not make you responsible for paying their credit card debt, according to the CFPB.

Debts that may be inherited include:

• Car Loans
• Credit Card Debt
• Home Equity Line(s) of Credit (HELOC)
• Medical Debt
• Mortgages

» Learn More: Inheriting Debt

What Happens If the Estate Is Insolvent?

It does not happen often, but there are times when the owner of an estate dies with more debt than assets, meaning the estate is insolvent. When this happens, the deceased’s family members still aren’t responsible for paying off any debts, but will not receive any inheritance.

The process remains the same – any assets are sold with the money going to pay off debts – but a priority order is established. Claims filed within a six-month timeframe of the estate being opened are usually paid in order of priority. Typically, fees — such as fiduciary, attorney, executor, and estate taxes — are paid first, followed by burial and funeral costs.

If the deceased member’s family was dependent on him or her for living expenses, they will receive a “family allowance” to cover expenses. The next priority is federal taxes. Medical expenses not paid by insurance are then paid, as well as property taxes. Credit cards and personal loans are usually at the bottom of the list; if no money remains, the debt may be written off.

Secured debts, such as a car loan or a mortgage, are also owed after the account holder’s death. The lienholder will reclaim the property, or a relative can assume responsibility for the debt through refinancing. The same is true with most reverse mortgages; you can refinance the loan if the home has been left to you.

Assets Protected from Creditors

Not every asset someone owns is up-for-grabs when they die. The law divides the deceased’s assets into exempt and non-exempt categories, with the primary distinction being that exempt assets can’t be liquidated to cover debts.

The list of exempt assets varies by state, but two major assets are exempt everywhere:

• Retirement savings
• Life insurance policies

Those two assets can be distributed to beneficiaries without regard to debts owed by the deceased. Learn more about what happens to retirement accounts when you die.

Some states designate other entities as exempt, so it’s wise to check the laws where you live. Florida, for example, says the surviving spouse or children have the right to exempt household furniture and appliances up to a value of $10,000, as well as two automobiles.

Assets that are non-exempt, meaning available to be liquidated and used to pay off debts, would include a house, car, boat, bank account, artwork, stamp or coin collection, or anything that has enough value to be sold.

» Learn More: What Happens to Retirement Accounts When You Die?

Send a Notice to Creditors

Another problem can occur if beneficiaries of an estate fail to realize that they should pay old debts before accepting the money left. Financial experts suggest you post a notice encouraging creditors to contact you with old debts the estate may owe if you are the beneficiary of an estate.

Typically, creditors have a certain amount of time to respond to these public notices; if they don’t, you have a good case against collection later.

The general rule of thumb is to go through an estate process with legal representation, carefully identifying any debts that must be paid and figuring out how much, if anything, will be left in the estate after all debts are satisfied.

If there are multiple executors, they will need to work closely to resolve all debt issues as the estate is settled. It’s relatively rare for family members to be asked to pay money out of their own pockets to cover a relative’s old debts. If this happens, make sure to document efforts by debt collectors. If you’re unsure about these debts, seek legal representation to determine whether you are being targeted inappropriately by a debt collector.

Remember, regardless of what debt collectors say, they’re bound by specific rules on how to go about collecting unpaid debts, especially when a death has occurred. Stand up for your rights and let creditors know that you will be vigilant in pursuing your best interests, even while grieving a lost family member.

Do You Have to Speak to Debt Collectors?

Debt collectors know that family members have no obligation to pay off their dead loved one’s debts, but that doesn’t stop them from trying to collect anyway.

It is not unusual for debt collectors to use the same tactics they are infamous for – badgering, harassing, and intimidating – on relatives of the deceased, hoping somebody caves in and pays the debts. All they care about is the money.

Executors and family members can block debt collectors from harassing them by sending them a cease-and-desist letter or hiring a lawyer and directing all calls to the law office.

However, the estate still owes the debt. If you are the executor, it’s your responsibility to figure out how to pay creditors by drawing on the money and holdings in the estate. You are not responsible for using your own money to pay off those debts.

Some creditors don’t even bother to file a claim, instead choosing to go directly to the family’s most vulnerable members. If creditors continue to harass you for payment as a family member, write a letter or contact your attorney to write one on your behalf to demand they stop all contact. Under the Fair Debt Collection Practices Act, creditors aren’t allowed to discuss someone’s debt with relatives, neighbors, or friends.

Who Can Debt Collectors Speak To?

Debt collectors can be relentless in their pursuit of a payoff. While the law offers protections for family members, it also allows debt collectors to contact family members to discuss obligations.

Under the Fair Debt Collection Practices Act (FDCPA), collectors can contact and discuss outstanding debts with the deceased person’s:

• Spouses
• Parents (if the deceased was a minor)
• Guardian
• Executor of the Estate
• Administrator

Debt collectors may not discuss a deceased person’s debts with anyone else.

How Long Do Creditors Have to Collect a Debt from an Estate?

Creditors searching for payment must present their request in writing during a prescribed time frame, which varies from state to state. In most states, the time limit ranges from 3-6 months for unsecured debts.

State laws require executors to post notice of the death, either in a newspaper or directly to known creditors, to give them a chance to file a claim. No claims are accepted after the time frame has expired.

Get Help Dealing with Debt After the Death of a Loved One

In summary, after a loved one dies, their assets are liquidated to pay off debts. Certain assets (life insurance, retirement accounts, etc.) are distributed to the will or estate beneficiaries. The process varies depending on location; some states require the surviving spouse to pay off the deceased’s debt, but in most cases, relatives have no such obligation.

Dealing with debt after a loved one passes can be a complex process that requires researching state laws and perhaps the aid of an attorney or financial professional.

Some options that can help you manage debt include:

• Debt Consolidations – Can be used to consolidate various high-interest debts into a new loan with more reasonable terms.
• Debt Management Plans – This can help borrowers set up a framework to tackle debt and balance budgets.
• Credit Counseling – Free advice from nonprofit credit counseling agents can give borrowers a clear view of their finances and ways to save.
• Personal Loans – Unsecured loans offered at moderate interest rates can help borrowers pay off debts and consolidate high-interest accounts.