Creditors have several options at their disposal to recover past-due balances on accounts. These include things like getting the debtor to agree to a payment plan or going through the court to have a paycheck garnished. But, those collections stop when the debtor passes away.
Once a person dies, creditors have to turn to the probate court to recover the money they’re owed. The claim must be made against the person’s estate, but some estates are worth less than the balances due to creditors.
What happens if the estate is smaller than the debts?
Creditors have to file a claim with the estate to let the person handling it know that there’s an outstanding balance to take care of. Each debt that’s provided to the estate is assigned a priority level based on the type of debt it is. Debts with higher priority are paid out first. Any debts remaining if the estate is exhausted won’t be paid.
All creditors must recognize that it’s very difficult to collect a debt once the estate is insolvent. If the debtor was an individual without any joint account holder or co-signer, there may be nothing that can be done. Creditors aren’t allowed to try to force family members to pay debts unless the family member has a legal obligation to do so.
For example, a spouse may be legally obligated to pay their spouse’s credit card debt. However, a debtor’s adult child wouldn’t have any obligation to pay the credit card debt unless they’re a joint account holder or co-signer.
Are assets ever protected from creditors?
Some people place assets into trusts when they’re handling their estate planning. If the assets are in an irrevocable trust, they are protected from creditor claims because the creator relinquishes control of them to the trustee who’s overseeing the trust. Those assets will be passed down to the intended parties once the creator of the trust passes away.
Collecting debts from a person’s estate must be done carefully to ensure compliance with applicable laws. Working with someone who understands the specific laws that apply to a situation is critical.