We hear lots of concerns about what happens to a person’s credit card, medical bills, and mortgage after they pass away. After the death of a loved one, families are faced with many responsibilities that can feel overwhelming. One purpose of estate planning is to make this process easier by providing a plan for how a person's assets and debts will be handled.
Although family members are generally not personally liable for a deceased person's debts, those debts (if valid) would be paid from the estate. When an estate is opened, the court appoints a personal representative to be in charge of the administration. If there is a Will, the Will states who the person wanted to serve as personal representative. The personal representative is responsible for managing the estate, ensuring that valid debts are paid, and eventually distributing the money to the beneficiaries. If assets are distributed before debts are properly addressed, a beneficiary may, in some circumstances, become responsible for returning those assets to satisfy the estate's obligations. The personal representative could also face liability for this type of misstep.
Paying Bills
The personal representative is responsible for paying the person's bills and valid debts using estate assets. Although this may seem straightforward, every estate is different, and the types of debts involved can affect how the law applies. For example, creditors have different deadlines for filing claims depending on whether they receive notice of the person's death. Because of these differences, it is important to identify and keep track of any bills or outstanding balances that may need to be paid during the probate process.
Things to look out for:
- Credit Card Balances
- Medical Bills
- Mortgages
- Auto Loans
- Tax Documents and Government Claims
Medicaid benefits for health insurance or long-term care
Under Indiana law, a deceased person's outstanding debts, such as credit card balances and medical bills, are generally paid from the assets of the estate; however, creditors must file their claims within specific deadlines. If a creditor receives notice of the decedent's death, the creditor has three months from the date of that notice to file a claim in the estate. If a creditor does not receive notice, the creditor generally has nine months from the date of death to file a claim.
A creditor who fails to file a claim within the applicable deadline is generally barred from collecting that debt from the estate. Because these deadlines can affect the administration of an estate, the timing of when to open probate may be an important consideration. A personal representative should discuss these issues with an experienced attorney to determine the best course of action based on the estate's specific circumstances.
Government claims are treated differently. Certain tax obligations and other debts owed to governmental entities are not subject to the same filing deadlines as most private creditors. As a result, a governmental entity may be able to assert a claim against the estate even after the deadlines for other creditors have expired. It is important for the personal representative to properly identify and address any tax liabilities or government debts to help avoid future problems and hassle.
Real Estate
While the estate is open, the personal representative is responsible for real estate and can pay related expenses out of estate funds. Mortgage debt can impact a beneficiary greatly, since it is tied to the real estate.
Sometimes the Will provides that real estate shall be given to a particular beneficiary; other times the personal representative has the discretion to sell it to a third party. Under Indiana law, the personal representative executes a deed transferring the real estate out of the estate, and approved estate debts and expenses should have been addressed before the transfer. If you are a beneficiary and take title a home, you become responsible for the rights and responsibilities that come with ownership from that point on. For certain beneficiaries, federal law provides protections for inherited property, including limiting the enforcement of a due-on-sale clause in mortgage agreements. Because every situation is different, it is important to consult with an attorney to understand your specific rights and responsibilities.
For a beneficiary inheriting real estate that has a mortgage, what happens next? Below are some options to consider in deciding how to move forward if you inherit real estate:
- Assume the Mortgage
- If you decide to keep the home, you may choose to formally assume the existing mortgage, if permitted by the lender and the loan terms. By assuming the mortgage, you become personally responsible for making the loan payments, and the estate is no longer responsible for those costs.
- Refinance the Real Estate
- Refinancing replaces the existing mortgage with a new loan in your name. This may allow you to secure a lower interest rate, reduce your monthly payment, or buy out other beneficiaries if you plan to keep the home. To refinance, you must qualify for a new loan based on the lender's requirements and your credit history. If approved, the new loan pays off the existing mortgage, and you become responsible for all future payments.
- Sell the real estate
- Selling inherited real estate is generally similar to selling any other property. Before selling, consider factors such as the home's value, market conditions, and any other consequences.
In conclusion, when a person passes away, their debts do not simply disappear but family members are not personally liable for the debts. Instead, outstanding debts are generally handled through the probate process and paid using assets from the estate. The personal representative is responsible for identifying valid debts, addressing creditor claims, and ensuring obligations are resolved before assets are distributed to beneficiaries. Understanding how debt is handled after death can provide families with clarity during a difficult time. By following the advice of good legal counsel, the personal representative can help ensure debts are addressed and assets are transferred appropriately.