Paying the Dead Person’s Debts

The law generally allows people to leave their estates to whom they wish after their death. They are expected, however, to have their debts paid before the estate is distributed. When an estate goes into probate, therefore (and there are some cases where it won’t), there is a process to give people a chance to make claims. Following this procedure can significantly shorten the time an executor has to wait for claims.

Almost everyone can expect that there will be some bills unpaid when they die. Hospital and funeral expenses and income taxes usually top the list. There may also be unpaid utilities, purchases, subscriptions, an so on. Most states ask for repayment of some welfare programs, such as Medicaid. Every once in a while, someone may claim someone committed a tort before they died. Very occasionally, someone will claim that the decedent agreed to make a will in their favor and think they can prove it. So, how do these bills get paid?

The answer is that the executor (if the estate is in formal probate) is expected to contact anyone who may have unfinished business. That means going through the incoming mail and files the decedent leaves to find anyone who might have a claim. A credit report also might be a good idea in some cases. Once a list is prepared, notices (in a form required by law) should be mailed or hand-delivered, and a report of the notices filed with the court. In both Oregon and Washington, the state also should be sent a notice.

Unfortunately, sending a notice only covers creditors who can be found. Every once in a while, there is a claim that the executor doesn’t know about. This is handled by publishing a notice in a local newspaper for several weeks. The newspaper will provide a report to the executor (or their lawyer) to file with the court.

Once the notices are sent and published, claimants only have a short time (in Oregon and Washington, the later of 30 days after a notice is sent or four months after a notice is published) to send in their claims. The executor should pay valid claims. If there is a dispute, the executor can deny the claim, but has to notify the creditor quickly. (In Oregon, it’s 60 days after receiving the claim; in Washington, the later of two months after receiving the claim or six months after publishing the notice in the paper). A denied claimants has 30 days to sue the estate (or, in Oregon, ask the probate court for a quick ruling). The executor and claimants also are allowed to settle disputes.

If there isn’t enough in the estate to pay everything, the executor should notify the creditors of the expected shortfall. The law sets the order to pay claims, and there will probably have to be some negotiations if anyone disputes their place in line.

Exceptions to the Probate Notice Process

There are three major exceptions to the notice process. First, the decedent’s (and estate’s) income taxes and any estate taxes are handled by a standard filing with the IRS and state.

Holders of mortgages, car loans, and other secured debts usually do not use the claim process to require immediate payment. Instead, the loan usually stays in effect and whoever inherits the collateral is expected to continue to pay.

Also, if the decedent had insurance to cover a claim, such as for a car accident, the claims process doesn’t apply. Instead, the claimant usually notifies the executor or sues the estate, and the insurer handles it.

Small Estates

If an estate doesn’t go into formal probate, the claims process is shortened. In Oregon, for example, a small estate (generally under $275,000) can be handled by filing a single notice with the court and notifying the creditors, and the person filing the notice agrees to cover the debts out of the estate. In Washington, a small estate (separate property plus one-half community property totaling under $100,000) can be handled by paying all debts, then filing a notice that the balance falls into the small estate category and taking responsibility for distribution.

Non-Probate Assets

Trusts, life insurance, some jointly held real estate and bank accounts, and some IRA’s and pension funds might not go into the estate in the first place. These usually don’t have to be used to pay debts (other than taxes, and possibly welfare recovery claims) unless the will or trust says so. In fact, sometimes people arrange their estate plans to minimize what’s available to pay certain debts, and the law allows it within reason.

Executors handling estates should be prepared to read through their loved one’s papers and mail, and search their computers, to identify possible creditors. They should also be ready to deal with those creditors if there is any chance of a dispute. This is one of the reasons probate usually involves a lawyer.

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One Response to Paying the Dead Person’s Debts

  1. Heath says:

    Once I had read the headline of this blog I was significantly surprised although looking at the entire posting, I fully understand it correctly. Definitely very useful content.

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