We get this question a lot. It is bad enough when a parent dies, but then the hounding from the parent's creditors begins. The creditors try to convince the grieving children that they are personally responsible for paying the parent's debts. As a general rule, this is simply not true, but some of the exceptions can swallow up the rule completely, so it is important to understand the nuances.
The general rule is nobody is liable to pay a deceased person's debts other than deceased person's estate. Bear in mind, however, that if you take possession of something that had been owned by your deceased parent without ensuring that all of or her debts were paid first, then you could be personally liable to the extent of the value of the property received. In some states, you have to return the property to the estate with interest from the date you took title or possession.
Some things you can't take possession of without probating the estate. These are things like bank accounts, real estate, motor vehicles and other personal property that were held in the decedent's name (i.e. not in a trust, not held as joint tenants with right of survivorship or tenants by the entirety, and no death beneficiary designation).
Probate is the court-supervised process of changing the title to assets from the name of the decedent to the name(s) of the decedent's heirs and/or beneficiaries. The process usually (except for some small estate procedures) includes a system for identifying and paying creditors. If a creditor wants to be paid, the creditor MUST file a claim with the probate court. There are deadlines for filing the claims. If a creditor does not timely file a claim in the correct manner, the claim is denied and forever barred. So, don't let a creditor intimidate you into thinking they are going to send YOU to collection or sue YOU in small claims court. They can't. If they do, you will win (unless you hold property of the estate that has not been probated, of course).
There are other deadlines that apply to creditor claims as well. First, there is the general statute of limitations that applies to the particular type of claim. Every state has laws that specify how long a creditor has to file a lawsuit on a claim or forever be barred from filing the lawsuit. The limitations periods vary by state and by type of claim. For example, a typical limitation period for bringing a lawsuit for injuries sustained in an automobile accident is one or two years. A typical limitation period for bringing a lawsuit on a breach of contract claim is four to six years. And so on. If the claim had already expired by the time the decedent passed, it doesn't somehow get revived by the death of the potential defendant.
If a claim is still viable as of the date of death of the decedent, then the claim must be timely presented in the probate of the decedent's estate. If there is no probate case, then a claim can't be filed. That means that the claimant might have to open a probate case in order to present the claim.
Be aware that if/when a probate case is opened, in most states the executor has the right and authority to claw back certain assets that would not ordinarily be part of the probate estate, i.e., property that automatically transferred outside of probate. An typical example would be real estate that passed to the beneficiary of a transfer-on-death deed in California (known as a beneficiary deed in Arizona).
The laws on this are highly state-specific. For example, there is no beneficiary deed device in Tennessee, and property that passes to a surviving spouse via tenancy-by-the-entirety in Tennessee can NOT be clawed back into the deceased spouse's estate in order to pay the deceased spouse's debts.
If nobody opens a probate case within a certain period of time after the death of the decedent, almost all claims against the decedent's estate are barred forever. (The major exception to this rule in Tennessee is claims by Tenncare for estate recovery, which pretty much go on forever until the claim is paid or released.) This claims period is one or years on most state. It is sometimes referred to as a "statute of repose" as opposed to a "statute of limitations" because it runs from a fixed date rather than from accrual or discovery. For more information on the claims filing periods in a few states, click the name of the state: Arizona, California, Tennessee.
Here is a simple checklist for determining whether a claim against a decedent must be paid:
- What is the general limitations period for this type of claim? Was it already expired before the decedent passed? If the claim has expired, you can ignore it.
- Has a probate been opened? If there is no probate case opened, there is no venue for presenting the claim. You can ignore all unsecured claims. Secured claimants need not be paid either, but if you don't pay them, they can foreclose on their collateral.
- If a probate case has been opened, did the claimant timely file a valid claim in the required manner? If not, you can ignore the claim.
- What is the statute of repose period? If that time already passed before probate was commenced, no claims can be presented (except that in Tennessee a release from Tenncare must be filed in order to close the probate case).
If you need help sorting through asset retitling and payment of creditors following the death of a loved one, give us a call. It's one of the many services that we provide.