Today’s Guest Blog was written by Crystal M. Duplay, Esq., Law Offices of Timothy Sullivan.
You are attempting to collect a debt and learn that the debtor is now a decedent. How should you proceed? Do you immediately close the file as uncollectable? Do you try to track down all the surviving family members who might be able to pay? Or do you file a claim in probate court? Filing a claim is a likely the best option to recover funds for your client and not violate consumer protection laws. This article will discuss how to recover a debt through the probate process.
What is probate? Probate is the court process by which a will is proven to be valid. In the majority of states, probate courts handle the process to validate a will. Each state can create its own rules and regulations governing that process. Generally speaking, when a person dies with certain assets, or if a person dies with a will, an estate will need to be opened. What exactly is an estate? An estate is simply all of the assets that a person owns at the time of his or her death.
Each state regulates the probate process for that state. Which debts and/or taxes (if any) must be paid from the estate can vary from state to state. If any assets remain after paying the required debt or taxes, then those assets are distributed to beneficiaries, heirs, or surviving spouses. A creditor can receive a portion of the estate through the probate process. In order to recover funds, the creditor must comply with the notice and filing requirements set forth by the state.
Certain types of assets are not subject to the claims of debt collectors or creditors. They do not go through the probate process and instead pass directly to the deceased person’s beneficiaries. Examples of this class of assets can include joint assets, proceeds from a life insurance policy, and most retirement accounts. However, if the life insurance policy names the estate as the beneficiary, then proceeds from the policy are part of the decedent’s estate and must go through probate.
The FDCPA and any state-level laws governing collections may apply to debt collectors, if they are attempting to collect a consumer debt through the probate process. If the debt collector is attempting to collect from the surviving spouse, or an executor of an estate, the surviving spouse or executor is protected by the FDCPA. Under the FDCPA, collectors can contact and discuss the deceased person’s debts with that person’s spouse, parent(s) (if the deceased was a minor child), guardian, executor, or administrator. Also, the Federal Trade Commission (FTC) permits debt collectors to contact any other person authorized to pay debts with assets from the deceased person’s estate. Debt collectors may not discuss the debts of a decedent with anyone else.
The estate of the deceased person owes the debt, not the beneficiaries or heirs. If there is not enough money in the estate to cover the debt, the debt will typically go unpaid. The beneficiary or heirs usually do not assume liability for the debts of the decedent or estate. As with so many things in life, there are exceptions to that rule. Beneficiaries or heirs may be responsible for the debt if:
- The beneficiary or heir co-signed the obligation;
- The decedent and surviving spouse lived in a community property state, such as California;
- The decedent resided in a state that requires a surviving spouse to pay a particular type of debt, like some health care expenses; or
- A third party was legally responsible for resolving the estate and didn’t comply with certain state probate laws.
If you are collecting a commercial debt, be certain to look for co-signors to pursue. Additionally, if the decedent was a principal in the corporation, check to see if the corporation will remain in business.
A creditor is permitted to file a claim against the estate of a decedent in order for debts to be paid. Each state’s probate court will outline the process. There is often a filing deadline for claims. The deadline is frequently less than one year. Many probate courts have specific forms. It is crucial to check the local rules for each court to ensure compliance. If a claim is not in compliance, it can be rejected.
A creditor may be permitted to file a creditor’s bill against the estate, if a debtor is due to receive an inheritance or portion of the decedent’s estate. A “creditor’s bill is an equitable measure by which a party having a valid judgment against a debtor may secure a lien on certain assets held by a third-party if the debtor lacks sufficient personal or real property to satisfy the judgment.” This measure will require the estate to pay to the creditor any funds that the debtor would have been paid through the probate process. A key point to remember is that creditor’s bills require the creditor to reduce the debt to a judgment.
Collecting from a decedent may be impossible, but recovering funds from the decedent’s estate need not be. It is important to act quickly to avoid being time barred from filing a claim against the estate.
This information is not intended to be legal advice. No attorney client relationship is created. Changes to laws, statutes, regulations, and costs can and do occur. It is strongly recommended that you contact an attorney for advice specific to your legal matters and state.
Crystal M. Duplay is an Associate Attorney with the Law Offices of Timothy Sullivan, a full-service, Veteran-Owned collection law firm located in Cleveland, Ohio. Crystal represents a wide array of creditors, in both commercial and consumer cases.