Carissa Giebel column: Debts of a Decedent
12:42 AM, Jul. 26, 2011 | Written by Carissa Giebel
Ever wonder what happens to debt when someone dies? Does the debt die with them? Well, just as the typical attorney would answer, that depends.
If the deceased leaves behind a will or a living trust, those documents would name a personal representative or trustee, who may notify creditors of the death and pay any known creditors out of the assets left by the deceased, if any. With a will, this notice must be given to creditors. A trust does not require creditor's notice, although notice does shorten the statute of limitations in which a creditor can make a claim.
When a will is left by the decedent, the personal representative likely will submit it to the probate court, which supervises the process of paying debts and distributing the remaining assets to beneficiaries. This court process often can become time consuming and costly, which is why some people plan to avoid probate. That's one of the many benefits of a living trust, which would name a trustee to ensure all known debts are paid out of the remaining trust assets.
If the deceased did not leave an estate plan naming a personal representative or a trustee, the probate court will assign an administrator of the estate, who will have the responsibility of notifying creditors of the death and paying any known creditors out of the estate assets, if any.
All known creditors are paid, if possible. After the notice is posted in the local newspaper, unknown creditors only have a few months to present a claim. After this window of time passes, the opportunity to present a claim expires and the personal representative or trustee is not required to pay the debts.
Any debt carried by two or more people, including debt of a married couple, usually would become the full responsibility of the survivor. Any debt where there was a co-signer, the co-signer could be responsible for repaying the full debt.
If there are no assets left in the estate or living trust, then most debt that is not joint debt or does not have a co-signer will die with the decedent. Rarely would survivors be required to pay an outstanding debt of the decedent. Oftentimes, some of the debt can be repaid out of the estate, but there are not enough assets to cover it all. Creditors may often receive a reduced sum and forgive the remainder of the debt.
What about student loans? Student loans can be different than most other debt. Federal student loans are discharged when the primary borrower dies, even if there is a co-signer. Private student loans, on the other hand, may not be forgiven when the primary borrower dies. The specific borrower would have to be contacted to determine whether any loans would be forgiven at the primary borrower's death.
Debts usually are paid first out of liquid assets, such as cash from a bank account. Sometimes assets must be liquidated to pay off debt, such as the sale of real estate. Some assets generally cannot be taken by creditors, such as 401(k) plans and life insurance policies naming a person as a beneficiary, rather than the deceased's estate.