What Happens To Your Debt After You Die?

By Associate Attorney Danielle Nodar

When you pass away, any outstanding debts that you owe, such as medical bills, taxes, mortgages, and credit card bills, continue to live on. This is true regardless of whether you pass away with an estate plan or intestate (i.e. without a will). While different debts are treated differently in terms of how they are secured and paid, the general rule is that any debt that was owed by you at during your lifetime is still owed once you pass away.

Thus, a main component of the probate process is the management and payment of creditor claims. Your personal representative, the person responsible for administering your estate, is required to provide notice to creditors that an estate has been opened to allow creditors to file claims against your estate. North Carolina law provides strict guidelines and timelines for providing sufficient notice to known and potential creditors. This includes providing written notice to known creditors (creditors who have sent bills to the decedent or to the estate) as well as publishing notice to creditors in a local newspaper. Providing notice starts the clock on a 90-day period where creditors must present their claims against the estate to the personal representative or risk the possibility of a claim being rejected for being filed too late.

Your personal representative is not responsible for paying your debts out of pocket; they use estate assets to pay claims made against the estate. If there is not enough cash to pay claims, any estate assets, including real and personal property, can be sold by the personal representative to create funds to pay estate debts. However, depending on the nature of the estate assets and liabilities, some estates may run into issues where there are more debts than there are assets even after available assets are sold.

Estates with insufficient funds to fully pay all of the estate’s obligations, which include debts as well as the expenses involved with administering the estate, are known as insolvent estates. If an estate is insolvent, all of the creditors may not be paid in full or paid at all. To help determine who gets paid first, North Carolina provides a list of the priority depending on the classification of the creditor. This list of priority allows for certain creditors to get paid in full before other creditors are paid and reads as follows:

     1. Costs and expenses of administration, such as court fees and attorney’s fees
     2. Property liens up to the amount of the value of the property
     3. Funeral expenses to the extent of $3,500. Any fees over this amount fall into #10
     4. Costs associated with gravestones and suitable burial place to the extent of $1,500. Any fees over this amount fall into #10
     5. Taxes, dues, and other claims under federal law
     6. Taxes, dues, and other claims under North Carolina state law
     7. Judgments made in any North Carolina jurisdiction; liens active on a decedent’s property as of the date of death; and Medicaid claims made by The Department of Health and Human Services
     8. Outstanding wages due to decedent’s employees accrued no more than 12 months prior to the date of decedent’s death; medical expenses, necessary drug costs, and medical supply fees accrued in the 12 months prior to the date of decedent’s death
     9. All equitable distribution claims
     10. All other claims. This is a broad category that includes all other debts such as personal loans or credit card debts.

It’s important to follow this list carefully because a personal representative can become responsible for failing to follow the order of priority. For example, if a higher priority creditor is not paid in full before a lower priority creditor, the personal representative could find themselves liable for the amounts owed to the higher priority creditor if there are not enough estate funds to fully pay both claims.

Even if an estate is insolvent, there are some assets that are exempt from creditor claims, which means that your loved ones will be able to retain the assets or funds regardless of what debts you owe. This includes life insurance or retirement accounts that name your spouse or child as a beneficiary or real estate owned with your spouse as “tenants by entireties” (TBE). If there is a surviving spouse or minor children, the personal representative should also apply for a family allowance, which provides for funds that are given to the family free and clear of creditor claims. These must be applied for within one year of the date of death, so it is crucial that a personal representative petition for these allowances as soon as an estate is open instead of waiting to see what debts come in.

If you have questions about payment of estate expenses or debts or creating an estate plan to help protect your assets from creditors, please give the attorneys at Jesson & Rains a call!