What Happens to a Person’s Debt When They Die?
One of the most frequent questions I receive in my probate practice is how to handle the debts of a person who has passed away. Most people want to know who has to pay the debt and what happens if the debt is not paid.
With few exceptions, the debts of a person who has passed away do not become the obligation of their legal heirs, or beneficiaries under a Will. Instead, the debts belong to the “Estate” and debt collectors, or “creditors”, may only force a payment through an estate administration. Creditors must present their claims for payment to the estate administrator, or Executor of a probated Will, and must do so within four (4) years of a person’s death.
Top 5 Debts After Death
State law determines the priority for payment of creditor claims out of the estate assets. The following debts are the most common debts people leave behind when they die, and how they are handled in a Texas probate and estate administration:
1. Funeral Expenses
Funeral expenses of up to $15,000.00 (along with expenses of a last illness, discussed below) receive the highest priority in terms of the order of paying creditor claims. However, estate administration is not an overnight process and most funeral homes require payment up front. The families of a deceased person will be expected to advance this cost before the probate and estate administration process can begin. Only after an estate administration is opened, can the person who advanced the funeral expense seek a reimbursement.
Many life insurance contracts (and sometimes bank account depository agreements), however, provide a basis for direct payment of funeral expenses when the family cannot afford the funeral expense.
2. Medical Bills
If the medical bills are associated with a person’s last illness, up to $15,000.00 of those medical bills receive the same payment priority as a funeral expense. “Last illness” expenses would include ambulance/emergency transport, hospital stay or emergency room treatment, and any other medical expense associated with the person’s death. However medical debt in excess of $15,000.00, or that was not incurred around the time of the person’s death, is considered an unsecured debt and receives a much lower payment priority–well after many other debts of the estate are paid.
Because a mortgage is generally secured by the property through a deed of trust signed by the debtor during their lifetime, the mortgage holder or “mortgagee” receives priority for repayment. In Texas, especially, most mortgagees reserve the right to a non-judicial foreclosure in the deed of trust. In sum, the bank gets paid when the assets is sold and is entitled to all unpaid sums, plus any interest, penalties, and attorney’s fees incurred in re-payment of the mortgage.
Additionally, mortgagees have the right to initiate estate administration proceedings if nobody else does. Thus, anyone desiring to continue living in a house after the mortgagor has died have few options: (1) advance the monthly cost of the mortgage until an estate administration can be opened and the house sold, or (2) initiate an emergency estate administration proceeding so that the property can be secured and the mortgage paid while the probate process is pending. Both options are costly.
However, when a person dies leaving an estate plan that includes a Will or Trust, it may be possible to have an executor or trustee appointed to the estate within a few weeks of that person’s death who can quickly gain access to estate assets to pay off the mortgage debt or sell the house.
4. Child Support
Death does not extinguish a child support obligation. In fact, if a person dies while still owing child support for a minor child, the support obligation “accelerates” with the full amount of remaining payments becoming due and payable on the date of death. Additionally, most assets are not exempt from child support garnishment including non-probate assets such as trusts, life insurance, and retirement accounts. Accelerated child support at death may be offset by assets and income received by the child upon the death of their parent, such as an inheritance of estate assets and Social Security survivor benefits.
Claims for accelerated child support receive higher priority than other unsecured creditor claims, but lower priority than funeral expenses, expenses of last illness, expenses of administration, and secured creditors. As such, parents who are owed child support may want to consider contracting with the obligor parent (the one who owes the child support) for a life insurance policy that can secure the remaining child support payments in the event of the obligor’s death. For added protection, the obligee-parent (the parent entitled to receive the child support) should own the life insurance policy, and therefore, the rights concerning any changes to the beneficiary designation.
Whether a loan is “secured” or “unsecured” determines the priority of its payment. A loan is “secured” if the debtor pledged an asset for the re-payment of the loan. For example, car loans are generally secured by the car. If the debtor does not pay the loan during their lifetime, the car can be re-possessed by the bank or lienholder. Similarly, in an estate administration, secured creditors can elect to be re-paid the debt in the course of the administration or can foreclose on the asset if the debt is not paid within a certain period of time. Personal loans, however, are unsecured and receive the lowest payment priority in an estate administration. Examples of personal loans include credit card balances and private student loans.
Planning for Debts after Death
The above list of debts is not comprehensive. There are many other claims that can be made during an estate administration as a result of a person’s death. However, anyone with these kinds of debts listed above should seek advice and assistance from an estate planning attorney and financial advisor, especially if they hope to leave some kind of financial legacy for their loved ones. When a family member dies, the last thing they want to consider during the grieving process are phone calls and letters from debt collectors. Thoughtful financial and estate planning can minimize the impact of debts on an inheritance and provide a secure future for one’s beneficiaries.
An estate planning attorney at Law Office of Adriane S. Grace, PLLC can help you secure your family’s financial legacy. Contact us to schedule your initial estate planning meeting to discuss further.