Do Heirs Inherit the Debts of the Deceased?
During a recent interview with an estate planning client, a question was raised about responsibility of the decedent’s debt. There is no standard answer as every situation differs and, while you won’t be around to worry about the process, it is an important thing to consider.
What happens to the decedent’s debt after death has come to the forefront of Florida estate planners’ problems during the recession and accompanying devaluation of real estate? Whether or not an heir is responsible for the debt obligations of his benefactor depends at first on the solvency of the estate.
Solvent vs. Insolvent Estates
An estate that is solvent consists of assets that exceed liabilities. Essentially, if the personal representative (PR) of the estate can add up all the assets of the decedent and all debt obligations can be paid off with those assets, the estate is solvent. On the other hand, if the PR cannot pay off the debt obligations of the decedent by using liquid assets in the estate or by liquidating either real or personal property in the estate, the estate is insolvent.
Generally, in an insolvent estate, whether the debt obligation will be collectible by a creditor depends on the type of debt. In the instance of a credit card, which is considered an unsecured debt, the creditor will most likely be forced to forgive the debt unless there is a co-signer. However, be sure to avoid using credit cards issued to the decedent, even if you were an authorized user while they were alive. Although authorized users of credit cards are not financially responsible for the balance, the use of a deceased person’s credit card is fraud. Unsecured debt that involved a co-signer is a different story. When someone co-signs on a credit card or loan application, the co-signer is guaranteeing the payback and will be held responsible for the debt even after the primary borrower’s death.
When it comes to secured debt, the process is quite different. Remaining balances on real property mortgages, car loans or other loans secured by specific collateral may be collected. Of course, depending on the homestead and marital status of the deceased at the time of death, some property may be exempt from creditors. Outside these exceptions, an heir may need to pay off the secured debt or assume a mortgage/payment plan in order to keep the property at issue.
Tips for Handling Creditors
Creditors typically get aggressive with PR’s and heirs with respect to collecting debts from a decedent’s estate. The following suggestions may help a PR and heirs in this situation:
1. PR’s should never distribute ANY assets until all debts are settled.
2. PR’s should be extremely diligent and proactive in determining the debts. Contacting credit bureaus and searching recorded property records is a good idea.
3. Heirs should direct all inquiries made to them about the decedent’s debt to the PR.
4. Heirs contacted after estate distribution should attempt to work with creditors. The creditor may be open to working out a payment plan if the money is rightfully owed.
The law can be complicated with respect to debt after death in Florida. Consulting an estate planning/probate attorney is an important step in understanding which assets can be shielded from creditors and how to do so.