What Happens to Your Debt When You Die?

It’s an understatement to say that having a loved one die is a terrible time for all.  Once the shock wears off, the next steps are to get through the memorial, the reading of the will and the inventory of possessions.   An unheralded event that often follows:  creditors come knocking on the door.

In some cases, you may be prepared for this to happen.  However, sometimes the deceased has credit cards or loans that are unknown to the immediate family or friends, with balances that can often be substantial.

What are your legal obligations in this case?  In general, creditors can only levy the estate of the deceased.  What this means is that if there are any assets or money left behind, the creditors typically get paid first before any money is given to the heirs.  Creditors will contact the executor (the person assigned to handle the assets of the deceased) and present the bill for the unpaid balances.  After the creditors are paid, the remaining funds are distributed to heirs per the dictates of a legal will.  If there is no will, state law dictates how assets are divided.   If there is no estate, creditors won’t receive any money.

Even if you don’t think you are legally obligated to pay the debts of your deceased relative, don’t be surprised if creditors become quite insistent. I’ve received the following question in one form or another many times

Question:

My mother died 6 months ago and apparently had some outstanding credit card debt of which we were unaware. She didn’t leave any money or property.  Both my father and I have been receiving letters from collection agencies and even have received phone calls from them.  The letters keep getting nastier and nastier and one of them even threatened to sue my father.  What do we do?  We don’t have any money and it makes no difference when I tell the collectors that my mother has died.  They insist me or my father is responsible to pay the debtfs.  If it helps you to know, she died (and lived) in Pennsylvania.

Answer:

First of all, let me express my condolences to you and your father.

In general, when someone dies, personal debt does not pass on to surviving family members.  Usually, when such an instance as this occurs (there are no assets in the estate), your mother’s creditors are out of luck. However, there are exceptions:

• If your father and mother had lived in Alaska, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington or Wisconsin, all debt acquired during marriage passes on the spouse in the case of their death, since these states are community property states.   Since your mother lived in Pennsylvania, the debt will not pass on to your father.

• Was your father a co-signor on any of the credit cards?  If he was, then he is responsible for the outstanding debt on those cards.   A note here: if he was a co-signor, his credit could also be taking a hit, as the bills have gone unpaid for the past 6 months.

If you and your father are clearly not obligated to pay back your mother’s debts, then why are the creditors calling?  Collectors can definitely seem to have no heart, and there is no law that prevents a creditor from asking a family member to pay off a debt left behind by a deceased person. Under the Fair Debt Collection Practices Act (FDCPA), a collector may call the spouse, parent or guardian.  They may also call the executor or administrator of the deceased’s estate.  The loophole here is that debt collectors often have no information on who is handling the estate. The Federal Trade Commission (FTC) has ruled that debt collectors are permitted to call friends or relatives to find out who is handling the affairs of the deceased. This opens the door to asking friends or relatives to pay off the debt.

How did the collectors get your debt?  In the case of default on credit card debt for any reason, credit card companies often sell debts to junk debt buyers.  Junk debt buyers are companies who purchase defaulted debts in large pools at very discounted rates.  Because of the size of the debt pools, the exact circumstances of all the debts may or may not be known or apparent, including whether the debt is legally collectible. As an example, in 2009 and 2010, Bank of America sold off bad debts despite having incomplete records on the debts they sold.

Even if the debt is known to belong to a deceased person, this will not stop collection activity in many cases.  Death collection activities are big business and there are debt collection firms who focus exclusively on death debts.  One is DCM Services.  Their website, dcmservices.com, talks extensively about probate (the legal process where a deceased’s estate is handled).   Another is Estate Information Services, LLC., whose website, estateinfoservices.com, prominently displays the slogan “Deceased Account Management.”

What to do if a collector/junk debt buyer continues to contact you or your father about this debt?  Under the FDCPA, it is your right to ask (in writing) that the company cease all communication with your family.  After receiving such a letter, it is a violation of the law for them to contact you unless they are communicating that they are about to take a certain action, like ceasing collection activities or filing a lawsuit.   If they persist, you should notify the FTC at ftc.gov or your state attorney general’s office.

For detailed information about laws regarding inheriting someone’s debts, we recommend you contact an attorney in your jurisdiction.  For those individuals who do not want to leave debts to their loved ones, talk to a probate or wills and trusts attorney to see if there might be a way to shield your beneficiaries from those additional burdens.