There’s Not Enough Money in the Estate to Pay Debts

When someone dies, their debt does not necessarily die with them. The estate of the deceased person survives and is obligated to pay any debts the deceased incurred during life. But what happens if there isn’t enough money in the estate to cover all of the decedent’s debts?

Joint Debts

The Federal Trade Commission (FTC), the nation’s consumer protection agency, has stated that family members are not obligated to pay the debts of a deceased relative from their own assets. But there are exceptions to this rule. You may be responsible for the debt if you:

• co-signed the obligation;
• live in a community property state, such as California;
• are the deceased person’s spouse and state law requires you to pay a particular type of debt, like some health care expenses; or
• were legally responsible for resolving the estate and didn’t comply with certain state probate laws.

These are called Joint Debts and they are now the surviving debt holder’s obligation. If you have any joint debts with someone who has died, you should contact the lender to check the terms of the loan and, if appropriate, to transfer all future bills to your sole name and address.You also need to check that any future payments are stopped from coming out of a bank account in the deceased’s sole name, as any such account will be frozen upon their death.

Individual Debts

If the debts are all in the decedent’s name only, they are individual debts that must be satisfied by the estate alone. The executor of the estate is obligated to sell off or liquidate assets to raise cash to pay the deceased’s creditors as much as possible. If there are insufficient funds left in the estate, creditors don’t get paid. They have no further options for collection.

The order of priority for payments from an insolvent estate is as follows:

1. Funeral, testamentary and administration expenses. Testamentary and administration expenses are the expenses incurred in dealing with your estate;
2. Creditors who have security, for example, mortgage providers;
3. Preferential debts – these are mainly taxes and social insurance contributions;
4. Ordinary or unsecured debts.

If an estate is not sufficient to cover all the debts of the estate, then the debts are paid from the following assets and in this order:

1. Property which was not dealt with in the will;
2. The residue –any property or assets that are left over after specific bequests are dealt with;
3. Property specifically appropriated for the payment of debts;
4. Property charged with the payment of debts;
5. Pecuniary legacies – these are gifts of money only, instead of property or goods;
6. Other bequests or gifts

If you have questions about whether you are legally obligated to pay a deceased person’s debts from your own assets, consider the experienced attorneys at Christopher B Johnson Law.