Five Things to Know About Creditors When Someone Dies

Five Things to Know About Creditors When Someone Dies

The death of a loved one brings forth a lot of emotions. While grieving can last a long time, at some point someone has to take a look at the financial affairs of the decedent. One big concern is debt, which can come in many forms: mortgage, credit card, personal loan, back taxes due, just to name a few. Understanding the basic rules can put your mind at ease if you take on the responsibility of estate/trust administrator. Here are some things to consider:

1. The first thing to understand is that taking on the responsibility of trustee or personal representative does not in any way make you personally liable for the decedent’s debts. Some collection agencies might try to coax you into thinking you have to pay from your own pocket, but it’s just not so. As long as you don’t personally guarantee a debt and you don’t try to hide the debt or do something illegal, you are never personally responsible.
2. Many, but not all debts are negotiable. This holds true for credit card debt in particular. Once the credit card company finds out the card holder has died, they typically sell the debt (at a very reduced rate) to a collection agency. If they contact you, it is appropriate for you to try to negotiate down the balance owed. I’ve seen the final negotiated bill be as little as one-third of the original bill, but there is no standard rule. Debt negotiation is an art form, and the more experience you have, the better chance you have to get the debt down. Your leverage increases if there is no need for probate (e.g. a living trust holds all assets). That’s because the collection agency then has to open a probate case themselves if they want to collect and that is time consuming and expensive for them. A quick settlement on the phone makes much more sense to them in that situation.
3. An outstanding mortgage is much less negotiable. The mortgage company has collateral they can get at — i.e. the home. By definition, a mortgage is simply a loan that is secured by real estate. Two things to know with a mortgage: First, you can call the mortgage company, and they are typically very flexible when it comes to mortgage payments. They will usually be compassionate and accommodating, but in the end, they will need their debt paid. Second, if the house is worth less than the outstanding mortgage, they will work with you because it is costly for them to try to recoup more than they can get for the house sale.
4. If the decedent had a trust or some of the estate was probated, then you are required to file a Notice to Creditors in a county legal newspaper. That is a good thing because in Michigan a 4-month deadline starts for unknown creditors to contact you. The deadline runs from the date the Notice to Creditors was first published and once the 4-month time period is up, even a creditor with a valid bill is out of luck – You don’t have to pay. I’ve used this effectively many times for medical bills that first show up after the 4-month period expires. Note that this legal debt cut-off only applies to bills you first learned of after the 4-month deadline.
5. Tax debt is different. The IRS is powerful, and the laws play in their favor. Take the initiative to make sure there is no outstanding tax debt before fully distributing the estate. The Notice to Creditors won’t protect you here either so check with the decedent’s tax preparer to make sure things are correct.
   It’s never easy to deal with the affairs of a deceased loved one. I hope the information above makes it a little more tolerable.

Fun Fact: After driving to and from Florida recently I got to wondering about our roadway system. I found it surprising that the United States has 3.9 million miles of roadway, of which 3 million miles are rural roads. The Interstate System accounts for only 1.2% of total mileage but carries 24.1% of total travel. I think most of those interstate travelers were congregated around Atlanta and Tampa when I was driving home last week!