Responsibility for unsecured debt upon death

Written by regina hamilton
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Responsibility for unsecured debt upon death
Unsecured debts may follow us to the grave. (tombstone image by Vera Kailova from Fotolia.com)

Over the next 50 years, trillions of dollars will be inherited by baby boomers and their children. However, according to Liz Pullman Weston of MSN, Money Central, a good portion of these inheritances might be eaten up by medical bills, inadequate insurance, taxes and debts. Unsecured debt after death is a complicated issue. State laws and the type of debt play a large role in how unsecured debts are handled after death of the account holder.

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Order of Importance

Each state's probate court system has a list of debts and how they rank in order of importance in terms of payment. There is some variation among the 50 states, but the following example is typical. First, the expenses for administering the estate must be paid. This includes court costs, attorney's fees and executor's fees. Second are a mortgage, tax liens and any other secured debt. Third, all funeral expenses must be paid. Fourth on the list are the most recent medical expenses. This includes doctor, hospital and caregiver bills. Fifth on the list is a family allowance for remaining spouses and any minor children to live on. Sixth on the list are any wage claims from employees, and finally all other debts must be paid.

Significance

Unsecured debts rank quite low on most states' probate lists. The significance of this is that sometimes credit card companies and unsecured lenders lose out. If there are sufficient assets in the estate, then the unsecured debts will be paid. If the estate is insolvent, then the unsecured debts might go unpaid. If there is money to pay some of the unsecured debts, then the probate courts will rank these in order of importance and decide who gets paid first.

Misconceptions

Surviving children and spouses of the deceased cannot be held liable for the deceased person's unsecured debts except under specific circumstances. One possibility is if the remaining family members agree to take on the responsibility. They can be held responsible for the deceased's unsecured debts if they were joint account holders or co-signers on the account. If they hold power of attorney over the deceased's estate and spend the assets, they will be expected to pay the money back. Finally, spouses that live in community property states might be held accountable for unsecured debts after the death of their spouse. An attorney's advice is best in this situation as each community property state has its own rules regarding debt.

Dealing With Creditors

Dealing with the deceased's unsecured debts is fairly straightforward. Once a person passes away, the executor of the estate notifies all creditors. He can do this by phone, but a creditor will want a copy of the death certificate. Once a creditor is notified, they must cease charging interest and penalties until the estate is settled. The executor of the estate shouldn't pay any bill right away, even if he is being hounded by collection agencies. First, he should establish if the debt is valid. Second, he should see if it has passed the state's statute of limitations, and finally, he should make sure of payment responsibility for it before paying anything.

Warning

Even if the survivors are not legally liable for a family member's unsecured debt after death, that doesn't mean that collection agencies will not try to retrieve the money. If a collection call comes, creditcards.com recommends the following steps. First, do not give then any identifying information, especially a Social Security number or banking details. Ask who the original collector was and the total amount of the debt, and demand proof of the debt. Finally, anyone contacted should ask why she is being contacted and note the answers.

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