Given the amount of debt consumers carry during their lifetime, it comes as no surprise that for many people this debt will remain unpaid after death. What happens to that debt when the person who was originally responsible for the debt passes away?
Ultimately, how that debt is handled depends largely on the type of debt owed. After someone dies, anything that person owned at the time of his or her death and anything he or she owed is all a part of the deceased individual’s estate. Essentially everyone has some type of debt when they die, even if it is just payment for funeral and last medical expenses. All this debt will need to be handled in the person’s estate by the personal representative, either appointed in a Last Will and Testament or appointed by the probate court.
The probate process involves paying off the deceased’s outstanding debt and distributing any assets from the person’s estate to his or her heirs. Once a probate case starts, a notice will be issued to all known creditors and published to all unknown creditors, giving them a chance to make a claim for payment against the estate.
One important fact that clients need to be aware of is that survivors are not personally liable for the debts in the sole personal name of the deceased. Any debt that was only owned by the person who passed away is now owed by the estate, not those surviving that person. However, if someone jointly owed on that debt with the deceased, the survivor of the two joint debtholders then still owes on the debt. This happens with people who co-sign on a loan or are co-tenants on a piece of property.
Priority Debt
Certain debts receive priority over other debts. Florida law has a specific priority list as to what debt is paid first from an estate. The first debt is money that reimburses the personal representative for any out-of-pocket expenses paid in administering the estate. The deceased’s last expenses, such as his or her funeral and burial expenses are given priority in payment. Next in priority is any outstanding federal tax debt, followed by the deceased person’s last medical expenses, if they were incurred in the 60 days leading up to that person’s death. Another priority is if the deceased left a surviving spouse or dependent children. They receive money for payments for living expenses. Unpaid child support and then unpaid business debts are then next in line. Only after all of those are paid, are other creditors issued payment for their claims. To receive payment, however, the creditor must file a formal request with the probate court.
Exempted Assets
Certain property is not included in a person’s probate estate and is protected from being used to satisfy payment of debts in the estate. These assets include those that involve a listed beneficiary, such as a retirement account or life insurance policy. These assets go directly to the beneficiaries listed on the deceased’s account. If the deceased also has a Trust and his or her assets are covered and titled in that Trust, they also pass to the person’s beneficiaries outside of probate. Many people utilize various forms of trusts to protect their assets for their surviving loved ones for this exact reason.
Insolvent Estates
If the majority of the deceased’s assets are covered in a Trust or go directly to a beneficiary, then no property exists in the probate estate from which to pay debts. Additionally, if the person passes away owning little property, his or her estate may be declared insolvent. A probate estate will likely still need to be opened to process any creditor claims, but the claims will be denied or discharged and left unpaid due to the person being insolvent at death. Creditors will still be allowed a chance to seek payment, but the chances of them receiving payment is minimal. Remember: creditors cannot seek payment directly from the deceased’s surviving loved ones. If the debt was only in the deceased individual’s name, the only source of payment that creditor can seek is from the probate estate.
Student Loan Debt
Student loan debt is a common form of debt carried by many. Federal student loans are forgiven if the borrower passes away before paying them off in full. When it comes to loans held by parents on behalf of a student, such as Parent PLUS loans, these are discharged if either the student or the parent passes away. Private loans, of course, will need to be handled in the probate estate and are dealt with differently than federal student loan debt.
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If you have questions on this topic or are in financial crisis and considering filing for bankruptcy, contact an experienced Miami bankruptcy attorney who can advise you of all of your options. As an experienced CPA as well as a proven bankruptcy lawyer, Timothy Kingcade knows how to help clients take full advantage of the bankruptcy laws to protect their assets and get successful results. Since 1996 Kingcade Garcia McMaken has been helping people from all walks of life build a better tomorrow. Our attorneys’ help thousands of people every year take advantage of their rights under bankruptcy protection to restart, rebuild and recover. The day you hire our firm, we will contact your creditors to stop the harassment. You can also find useful consumer information on the Kingcade Garcia McMaken website at www.miamibankruptcy.com.
Related Resource: CNBC.com