debts & death: who’s responsible

One question I am often asked by clients is, “Am I responsible for my parents’ debts?”  Typically, the answer is, “It depends.” Debts can range from credit card debt, taxes, unpaid medicals bills to liens on real property and secured debts.

Generally, any outstanding debts of a decedent will be paid from their probate or intestate estate. Their probate (if they passed away with a valid Last Will and Testament) or intestate (if they passed away without a Will) estate consists of assets that are in the decedent’s name alone at the time of their death, including bank accounts, real property, cars, stocks, etc. If there are assets in the decedent’s name alone, it is then the role of the executor or administrator to ensure any outstanding debts are paid from the estate before any beneficiaries or heirs are given their inheritance.

There is also a hierarchy under New York State Law as to which debts are to be paid first. Under New York Estate, Power and Trust Law (EPTL), 1) funeral expenses have first priority for payment followed by 2) debts entitled to a preference under the Laws of the United States and State of New York; 3) taxes assessed prior to death; 4) judgments and decrees against the decedent; and 5) all other bonds, sealed instruments, notes, etc. These debts must be paid first. If there are no funds remaining in the estate to pay the other debts, then the other creditors may not have any recourse. Credit card debts are the last debts of the estate that should be paid. The executor or beneficiaries are not usually personally liable for these debts, according to the Federal Trade Commission; and the Fair Debt Collection Practices Act prohibits collection attempts for credit card debt against a surviving relative or beneficiary.

But what if there is no estate? What if the decedent passed away with no funds in his or her name alone? For example, many individuals use probate avoidance mechanisms, such as joint bank accounts, beneficiary designations or trusts to avoid probate. In most cases, if assets have named beneficiaries and pass “by operation of law,” the creditor has no recourse. There are some exceptions to this rule. If, for instance, the beneficiary accepted joint responsibility for the debt, they can be held liable to the creditor for payment of the debt. We often see this with admission agreements to nursing homes or assisted living residences: when a family member or spouse signed the admission agreement for an ill or mentally incompetent family member or spouse. Medical debts also can pass to a spouse because spouses have a “joint obligation of support.”

What about student loan and car debt? Student loan debt depends on the type of loan. More often than not, a federal student loan will be discharged upon death. With private student loans, the terms of the loan agreement may require payment from a deceased person’s estate or from the co-signor, if there is one. Regarding car debt and more specifically leases, one would logically think that if you die during the term of a car lease, the leasing company would take the car back with all future lease payments being released. Unfortunately, that is not always the case. Many early termination clauses in lease agreements state all remaining lease payments are immediately due and payable upon the death of the signor and the car must be immediately returned as well.

In a nutshell, protecting yourself from becoming responsible for the debts of a relative is important and can be avoided by not agreeing to pay debts of a deceased person during their life, keeping your personal finances separate. And if you are the executor or administrator, make sure you are following New York law for paying creditors in accordance with the proper hierarchy.


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