Who Pays Your Creditors After You Pass Away?
If you are doing estate planning, you probably intend that your beneficiaries will get whatever you designate that they get in your will, trust or other estate document. But what about your creditors? Do your beneficiaries or surviving family have to pay your creditors?
No Automatic Debt
Unless they are on the debt—that is, they signed to accept responsibility for it, such as a husband and wife with a joint credit card account—your creditors can never go after your family, directly, for payment of your debt (there is some room for creditors to make claims on jointly owned marital property however).
Claims on the Estate
But the things you leave to your family in your estate plan, are a different story. Creditors can, and often do, make claims on your estate. That means that your beneficiaries and family are, in a way, indirectly paying your debts, because the debt (if valid) is being subtracted out of whatever your beneficiaries were supposed to get from your inheritance.
With certain exceptions, such as with taxes, most private company creditors or individuals must make a claim on your estate, in order for them to get money from what you are leaving to the family.
When someone passes away, a personal representative (or his or her attorney) will send letters to the deceased’s creditors, announcing the death. From there, creditors have about four months to make claims on the estate. If a creditor doesn’t get notice of the opening of the estate in probate court, the creditor will have one year to make its claim.
This is only a notice. The creditor still must respond to the notice, by asserting the claim for its debt. Some do, and some do not.
Some creditors will never bother, extinguishing their claim forever. Others will make a claim, but those claims can be disputed or fought. If your estate disputes the creditor, the creditor must file a lawsuit within 90 days, or else the claim is lost.
The probate court will then handle the legal issues surrounding the dispute of the debt. Many creditors would rather just resolve the matter, then spend attorneys fees and other money, to collect a debt where the debtor is now gone.
The money from your estate will be distributed after the four month time period has expired (assuming creditors have been notified, and assuming no creditor claims have been asserted). If a claim is asserted, some, or all, of the estate will have to wait to be distributed, until the dispute of the creditors claim is resolved in the probate court.
Sometimes, your estate may want to just pay off the claims, to resolve all matters, and get the inheritances distributed as quickly as possible. Your personal representative must petition the probate court for permission to do so.
Call the Torrance will and estate attorneys at Samuel Ford Law today for help drafting your estate plan and for any help with your probate case that you might need.