Understanding the financial and legal consequences of a family member’s death often can be confusing. When people die, their debt and financial agreements go into a kind of limbo.
Although legal structures exist to help surviving family members handle these situations, many of us aren’t well-read on the subject, and when you encounter debt collectors who want you to pay a dead relative’s debts, you may not know the facts on how the American legal system views this kind of financial responsibility.
If you’re wondering about how responsibility for a dead person’s debts usually works, the U.S. Federal Trade Commission (FTC) maintains a relatively straightforward guide to the rights and responsibilities of surviving family members.
As the FTC points out, a general set of standards called the Fair Debt Collection Practices Act applies to this kind of debt collection. What the FTC guide shows is that, apart from some specific situations involving co-ownership of assets and debt, surviving family members usually don’t have to pay the debts of someone in their family who has died.
Estates and Executors
In most cases, existing debts are paid from the dead person’s estate. The estate is simply the assets and net worth of the individual. For example, outstanding loans on cars or other products may be paid off with equity the individual had in a home or other property.
Creditors in search of payment must present their request in writing during a certain time frame; no claims are accepted after that time frame has passed.
Requests go to the person in charge of the estate, who is either an attorney or an executor specifically named in the deceased’s will. The executor is responsible to pay the debts out of the estate.
Executors can block debt collectors from harassing them, but the estate still will owe the debt. If you are the executor, it’s your responsibility to figure out how to pay creditors — not with your own money, but by drawing on the money and holdings in the estate when the owner died.
Not all creditors bother to file a claim and instead pressure members of the family to clear the debt. You are not liable for any debts unless you co-signed on the credit card or loan. Authorized users on the account may or may not be responsible for the debt.
If creditors continue to harass you for payment as a family member, write a letter or contact your attorney to write one on your behalf to demand they stop all contact. Under the Fair Debt Collection Practices Act, creditors aren’t allowed to discuss someone’s debt with relatives, neighbors or friends.
Claims filed within a six-month timeframe of the estate being opened are usually paid in order of priority. Typically, fees — such as fiduciary, attorney, executor and estate taxes — are paid first, followed by burial and funeral costs.
Family allowance, depending on state statute, can then be distributed to family members, followed by outstanding federal taxes. Medical expenses not paid by insurance are then paid, as well as property taxes. Credit cards and personal loans are usually at the bottom of the list, and if no money remains, the debt may be written off.
Secured debts, such as a car loan or a mortgage, are also owed after the account holder’s death. The lienholder will either reclaim the property or a relative can assume responsibility for the debt through refinancing. The same is true with most reverse mortgages; you can refinance the loan if the home has been left to you.
Cases Where Family Members May Have to Pay
One of the clearest situations in which you may have to pay a dead relative’s debt involves co-signing. If you have ever co-signed a loan or other credit for that person, you may have financial responsibility.
Other situations involve people who live in states that have more far-reaching rules on debt collection for assets, known as “community property states.”
In addition to the above, you may have to assume a dead relative’s loan if you also are receiving the asset attached to the loan — for example, a car or property.
Another problem can occur if beneficiaries of an estate fail to realize that they should pay old debts before accepting the money that is left. If you are the beneficiary of an estate, financial experts suggest that you post a notice encouraging creditors to contact you with old debts the estate may owe.
Typically, creditors have a certain amount of time to respond to these public notices; if they don’t, you have a good case against collection later.
The general rule of thumb is to go through an estate process with legal representation, carefully identifying any debts that must be paid and figuring out how much, if anything, will be left in the estate after all of the debts are satisfied.
If there are multiple executors, they will need to work closely to resolve all debt issues as the estate is settled. It’s relatively rare for family members to be asked to pay money out of their own pockets to cover a relative’s old debts.
If this happens, make sure to document efforts by debt collectors. If you’re unsure about these debts, seek legal representation to figure out whether you are being targeted inappropriately by a debt collector.
Remember, regardless of what debt collectors tell you, they are bound by specific rules on how to go about collecting unpaid debts, especially when a death has occurred. Stand up for your rights and let creditors know that you will be vigilant in pursuing your best interests, even while grieving for a lost family member.