In addition to family and friends, almost everyone leaves debts to mourn when they die. In my practice, I have seen many people, especially older people, who live by the “cash and carry” mentality – they never live beyond their means and pay everything in cash. The debt they accumulate is usually made up of current household utility bills. On the other hand, I have seen many people leave large debts to their heirs and beneficiaries after their death. Debts can include mountains of unsecured credit card balances, back taxes owed to the IRS, medical bills not covered by insurance, and/or mortgages on property they own.

Not all debts are the same. A distinction must be made between unsecured debt and secured debt. The latter is an obligation secured by tangible property, such as a mortgage on a house. Everything else falls into the category of unsecured debt. The type of debt and the process used to distribute the deceased person’s assets determine how the debt is handled.

If there is a beneficiary designation on death for assets such as life insurance, bank accounts, or retirement assets, proceeds from the account will go directly to the beneficiary and an unsecured creditor cannot collect the proceeds . However, for assets that are in the name of the deceased person without a beneficiary designation, these assets can be reached by an unsecured creditor.

Secured creditors are faring much better. If the mortgage payments are late, the mortgage holder can foreclose on the mortgage and recover the property. The same applies to the repossession of vehicles still paid for on credit. Heirs and assigns will have to make the difficult decision of whether to attempt to repay the outstanding balance and keep the property or sell it. When there is little equity in the property relative to the debt, there is usually no choice but to sell. This is especially true for homes subject to a reverse mortgage.

If the deceased person’s estate is to go through probate, the law requires that notice of the proceedings be given to all known and readily identifiable creditors of the deceased by the personal representative of the deceased person’s estate. The creditor has the option of presenting their claim and the personal representative must either pay the claim in full, negotiate a settlement, or dismiss it. During probate, the law also requires that other potential claimants be advised of their right to pursue a claim, such as the Department of Health Services (for reimbursement of Medi-Cal payments) and the Franchise Tax Board (for back taxes due to the State of California). . A creditor even has the right to initiate probate proceedings to recover a debt!
The good news is that in most cases, heirs and assigns are not personally liable for the debts of the deceased. The exception is the surviving spouse – he or she may be responsible for debts of deceased spouses depending on the type of debt. I always warn people dealing with a deceased person’s estate not to pay all creditors upfront. It is possible that some of the unsecured debt will “disappear”, especially if the one-year statute of limitations for debt collection has expired.

© 2022 by Marlene S. Cooper. All rights reserved. (You can get more information on the website www.marlenecooperlaw.comby email to [email protected]by phone at (626) 791-7530 or toll free at (866) 702-7600. The information in this article is general in nature and does not constitute legal advice. Seek the advice of an attorney before acting or relying on any information in this article).

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John A. Bogar