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The short answer: No, the debt does not simply go away when someone dies owing a debt. Generally speaking, a decedent’s estate is responsible for paying any unpaid debts, and no one else is required to pay those debts. When a decedent dies, their assets pass to their estate, and if there is no money or property left, then, usually, the debt will not be paid.
The estate’s assets are handled by the personal representative (Florida’s term for an executor), who pays the decedent’s debts from the estate’s assets. Payment of a decedent’s debts is part of the personal representative’s duty during the probate process. Typically, the estate’s heirs are not responsible for paying the debts of the deceased, regardless of what some debt collectors may want you to believe.
That being said, you may be responsible for repaying a debt if, perhaps, the debt is shared or you own part of the debt, you borrowed the money as a co-signer together with the decedent, or you received substantial benefits from the debt such as payment of personal living expenses.
One of the first questions asked is how to find out who the decedent owned money to, and this can be determined by reviewing the decedent’s financial records. It has happened where pulling a decedent’s credit report may be necessary to determine where the decedent had credit accounts or credit cards, particularly if there are not any financial statements or credit card statements located after a search.
During the probate process, the known and reasonably ascertainable creditors will be served with a notice to creditors, and those entities or persons are to file a claim in the estate reflecting what they believe is due to them from the decedent. It is the job of the personal representative to review those claims and determine whether the claims are valid and should be paid.
Creditors of secured debt have the ability to take possession of the item used to secure the debt, or alternatively, these creditors can receive payment from the estate. Creditors of unsecured debt have an interest in the estate. Also to note, the assets available for a creditor to make a claim against may depend upon whether the decedent had a trust (and the type of trust) as a revocable trust does not protect assets from creditor claims.
The personal representative will do an accounting for the estate – listing not only the assets, but also all of the liabilities.
If insufficient funds are unavailable, the personal representative may attempt to negotiate with creditors to pay a lesser amount or even request (and obtain forgiveness altogether) for the debt. If there are not enough assets in a decedent’s estate to cover debts, the estate is considered “insolvent” and the estate’s beneficiaries will receive nothing, but they also will not be responsible for the payment of a decedent’s debts. Some of the different kinds of debts that may be encountered in a decedent’s estate are discussed below.
Credit Card Bills. Credit card bills belong to the account holder (unless the account is a joint account) and should be paid from the estate. These may be negotiable, depending on the financial institution and the amount due, but it is a personal representative’s duty to review the bills and determine if the debt owed is indeed valid and legitimately that of the decedent. These debts may show up on a credit report pulled for the decedent if there are no credit card bills or credit cards found in the decedent’s belongings, and these credit card companies should receive a copy of that notice to creditors as well.
Medical Debt. Medical debt is not discharged after death. It becomes one of the liabilities of the estate, and is often one of the last bills a decedent has and these can be rather costly.
Medicaid Estate Recovery. Families and beneficiaries may also have unexpected medical debt after death: Medicaid estate recovery. These are long-term care costs for Medicaid beneficiaries aged 55 and older. Once the person dies, Medicaid can seek repayment for these expenses from an estate.
Funeral expenses. Funeral costs and burial or cremation expenses are also estate debts, unless the decedent prepaid these expenses. Often times these instructions are left together with a copy or the original of a decedent’s will.
Student loans. Student loan debt comes in a variety of types, and all ages can be affected. The good news is that federal student loans are discharged upon death; in other words, a student’s estate is not responsible for repayment of remaining federal student loan debt. Parent PLUS loans are discharged either on the student’s death or the parent who is responsible for the loan. Endorsers or co-borrowers on student loans also are discharged from repayment. Private student loans vary in how they handle student loan debt, as some are discharged by the lender and some require a parent to continue payments on a parent-student loan.
Personal Loans. The decedent may have taken a personal loan as well, which typically are from a parent, family member or friend. That loan may or may not be a legally valid claim against the estate. With any luck, the agreement and its terms were in writing, but verbal agreements can also be legally binding. The personal representative should consult their probate attorney regarding personal loan issues, and it is not uncommon for these to be repaid for the sake of family relationships, often by agreement of family members. The short story here is that, if the decedent made a personal loan to someone, that is a debt owed to the estate and it is the personal representative’s job to collect that debt.
Car loans. Typically these do not disappear when the car’s owner dies, but often the loan documents will have provisions for the repayment of the loans upon death. A co-signer on a loan also would have responsibility for repayment.
Payment Responsibilities
One question often asked is about death benefits from a life insurance policy. Life insurance policies without named beneficiaries do become part of a decedent’s estate, and these monies can be used to pay debts. Beneficiaries of life insurance policies are not required to use those funds to pay a decedent’s debts.
Sometimes assets may be sold by a personal representative to pay creditors, and the beneficiaries do not receive their share(s) from the estate until after the estate’s debts have been paid.
Importantly, a personal representative is obligated to pay the decedent’s debts in a certain order of priority, which in Florida is spelled out by Fla. Stat. 733.707:
(1) The personal representative shall pay the expenses of the administration and obligations of the decedent’s estate in the following order:
(a) Class 1.—Costs, expenses of administration, and compensation of personal representatives and their attorneys fees and attorneys fees awarded under s. 733.106(3).
(b) Class 2.—Reasonable funeral, interment, and grave marker expenses, whether paid by a guardian, the personal representative, or any other person, not to exceed the aggregate of $6,000.
(c) Class 3.—Debts and taxes with preference under federal law, claims pursuant to ss. 409.9101 and 414.28, and claims in favor of the state for unpaid court costs, fees, or fines.
(d) Class 4.—Reasonable and necessary medical and hospital expenses of the last 60 days of the last illness of the decedent, including compensation of persons attending the decedent.
(e) Class 5.—Family allowance.
(f) Class 6.—Arrearage from court-ordered child support.
(g) Class 7.—Debts acquired after death by the continuation of the decedent’s business, in accordance with s. 733.612(22), but only to the extent of the assets of that business.
(h) Class 8.—All other claims, including those founded on judgments or decrees rendered against the decedent during the decedent’s lifetime, and any excess over the sums allowed in paragraphs (b) and (d).
(2) After paying any preceding class, if the estate is insufficient to pay all of the next succeeding class, the creditors of the latter class shall be paid ratably in proportion to their respective claims.
Should you have questions concerning your estate plan, life insurance, and the impact of your debts on your family and loved ones, you should not hesitate to contact your trusted estate planning lawyer.