"Debts of the Dead" sounds like a strange financial horror movie, where the debts of the dead lumber after, and eventually consume, the living. While it is not common, there are ways in which the debts of the dead can "haunt" family members.
Generally, the estate of the deceased pays the debts of the deceased. The executor of the decedent's estate is in charge of notifying and handling known creditors, as well as those who file a valid claim within a specified time after death (time limits vary by state). Assets are liquidated if necessary to cover the debts.
IRAs or 401(k)s that have designated beneficiaries pass directly to the beneficiary and are not applied to pay debts. However, if the deceased did not designate a beneficiary, these plans may potentially be lumped into the probate assets and be available to creditors – depending on state law.
If the estate's assets are enough to cover the collective debts, the estate is said to be solvent and the remainder goes to beneficiaries. If the debts of the estate are greater than the assets, the estate is insolvent, and there is nothing for beneficiaries to receive. This is true whether an estate is handled by an executor within probate or by a trustee within a trust.
Can family members be responsible for the decedent's remaining debt? Not usually, but there are circumstances where it can happen, such as:
- Co-Signing – If you co-signed with the deceased for a debt, such as a credit card or loan, your debt is considered to be jointly held and you are responsible for paying it.
Note that there is a difference between a co-signer and an authorized user. Authorized users are generally not responsible for repayment, although there are some state laws that supersede this (see "Community Property" below).
- Inheriting Secured Debt – If you inherit property that was purchased through a secured loan, such as an auto loan or home mortgage, you are responsible for the debt. You can either sell the property to pay the debts and pocket the difference, or refinance and assume the remaining debt. Non-payment allows the lienholder to foreclose on or repossess the property.
- Community Property – Community property states typically consider both assets and debts acquired during the marriage as equally owned, and thus may require you to pay any unpaid debts. Even if your state is not a community property state, it is best to check for quirky state laws regarding incurred debts of spouses.
- Incorrectly Resolving an Estate – If you were responsible for resolving the estate and violated state probate laws, you may be held liable for certain debts.
An insolvent estate puts a significant burden on the executor, as he or she must correctly wade through state law to prioritize and execute the bill payments. State laws dictate who gets paid in full, who gets a partial payment and who gets nothing.
If you inherited property from the deceased, debt collectors may attempt to contact and harass you to assume responsibility for the decedent's debts. Unless you are in one of the situations above where you are responsible, do not put up with the abuse. Contact the Federal Trade Commission or your state Attorney General's office to lodge a complaint against the collector. The Fair Debt Collection Practices Act offers you protection from these tactics.
To avoid being a victim of the "Debts of the Dead," check the above situations and individual state laws to verify that you are not responsible for any of the decedent's debts, or consult with an attorney.