What if Mom or Dad has died and they have really racked up the debts? In order to pay the bills, they took out home equity loans or charged up thousands or tens of thousands of dollars on their credit cards.
After payment of the funeral, there may be little or no equity in the home or the credit card debt may be far in excess of the equity value in the home and other assets. What should you do in this situation?
If the debts are in excess of the assets or property of the estate, the creditors are the only ones who actually have an interest in the estate. The family at that point has no legal interest in the estate because pursuant to Michigan law, creditors’ claims have priority over bequests and inheritances.
However, property which passes to you through joint ownership or by a beneficiary or payable on death designation, is not considered an estate asset and is generally not subject to claims of estate creditors. Unless there is a mortgage or other lien on this property, it passes to you free of these estate debts and creditor claims.
For example, if Dad left you a $20,000 bank account through a payable on death designation, the creditor to whom Dad owed $10,000 could not touch that account. The $20,000 is all yours.
When there are more estate debts than assets, there is really no need for you to go through the time, effort, aggravation and expense of the probate court process. If you did, you would be just going through an exercise for the benefit of the creditors. If the creditors want the assets, let them go through the probate process at their expense.
Even if the family is not liable for the debts, bill collectors often hound the next of kin to pay off these debts. How do you get the bill collectors to stop? The quickest and best way is for you to hire an estate settlement attorney at your own expense. That may not seem fair, but it is effective.
Have your estate settlement attorney review all of the debts to see if anyone other than the deceased is liable for them. If only the deceased is liable, your attorney could then draft a letter to the creditors stating that there are no assets to probate or that the debts of the estate are in excess of the assets, which will not be probated. A copy of the death certificate should be attached to the letter to give proof of death to the creditors.
If there are assets that need to be probated but will not be probated by the family, I recommend that a listing of all assets and debts with account numbers be included with the letter. This listing allows creditors to know what is available to satisfy debts so they can take whatever action they deem necessary to protect their interests. The family then must abandon the deceased’s property in favor of the creditors. Often times, this is tough to do.
If your spouse died leaving more debts than assets, you may think that you are responsible for their debts. In most instances, there is no legal obligation for you to pay the sole debts of a deceased spouse. You are generally only responsible in the case of joint debts such as a mortgage note, credit card agreement or loan agreement which you co-signed with your spouse.
Even if you sent an attorney letter to all the creditors, you may still get calls from the bill collectors demanding that you pay your deceased spouse’s debts. Bill collectors usually will not tell you that you are not liable for your deceased spouse’s debts. You can then just tell the bill collector to stop calling you and to contact your estate settlement attorney directly.
So if you are in the situation where Mom or Dad or your spouse dies and leaves more debts than assets, before you start paying on those debts, contact your estate settlement attorney. Your attorney should be able to review the assets and debts and make a determination of who, if anyone, is liable for any of those debts.
You might be able to save yourself thousands or tens of thousands of dollars in expenses by spending much less consulting with an estate settlement attorney.
By: Matthew M. Wallace, CPA JD
Published edited September 13, 2009 in The Times Herald newspaper, Port Huron, Michigan as: Use a lawyer to determine who must pay debt