Texarkana Estate Planning Attorneys Discuss Texas and Arkansas’ Rules for Paying Debt After Death
Almost everyone who passes away will leave behind some combination of property, possession, and outstanding debt. Although creditors can’t typically file claims against a deceased person’s heirs and beneficiaries, they’re sometimes entitled to petition the decedent’s estate. Executors are required by law to review any valid creditor claims and pay them—an obligation that helps settle old accounts, but which can leave heirs empty-handed.
If you’re the executor of an estate, or believe that your rights to inheritance are being threatened by unreasonable debt collectors, you could have options beyond dodging phone calls or forfeiting a loved one’s legacy. Read more to find out about what happens to debt after death, or contact Ross & Shoalmire’s experienced team of Estate Planning attorneys to schedule your initial consultation.
An Overview of Death and Probate
After someone passes away, the sum of their physical legacy—what they owned and debts they had—must be either redistributed or resolved. In Texas and in Arkansas, this process of redistribution most often takes the form of probate.
During probate, the estate’s executor files a petition with a local court and submits a copy of the deceased person’s will for verification. If the will is found valid, probate will commence. Most probate cases consist of the following steps:
- The estate executor initiates probate.
- The estate executor sends notice of probate to all interested parties, including the deceased person’s close living relatives, the decedent’s other named beneficiaries, and the estate’s creditors.
- The estate executor will begin the often time-consuming task of locating and inventorying all of the decedent’s assets. This process can take a very long time, as it requires the estate executor to attempt to locate “hidden” or “lost” assets, such as old life insurance policies or secret safe deposit boxes.
- After the executor creates a comprehensive inventory of all estate assets, they must review any creditor claims placed against the estate. This can also be time-consuming, as not all creditor claims are legitimate. However, even if a claim is rejected or contested, it must be resolved before probate can be completed. This sometimes necessitates defending the estate from a lawsuit.
- Once claims against the estate have been resolved, the executor may distribute inheritance to heirs and beneficiaries.
Most simple probate cases move from start to finish within a year, but unexpected challenges—whether in the form of a disgruntled heir’s lawsuit or an unreasonable creditor claim—can prolong the process.
What Happens to Debt After You Die?
Money and property are used to repay outstanding debt. If you die without sufficient assets to meet obligations, then your debt will usually remain unpaid in perpetuity.
Barring scarce few exceptions, creditors have no right to demand repayment from a deceased person’s heirs and beneficiaries—but this guideline may not stop them from trying, or from filing separate claims against the decedent’s estate.
Estate Assets and Debt Repayment
For better or worse, death doesn’t erase debt, and different types of it affect processes like probate and trust administration. In general, the person in charge of estate administration—such as the executor or personal representative—is responsible for repaying the estate’s debt from the estate’s own assets.
Assets could include any of the following:
- A vacation home
- Another real estate property, including business or commercial properties
- Motor vehicles, including cars, motorcycles, and recreational vehicles
- Certain types of financial accounts
- Most other assets not protected by a trust, a beneficiary designation, or other Estate Planning instrument
After the executor marshals, inventories, and appraises these assets, their value may be compared with that of any approved creditor claims. This process of repayment is typically overseen by a Texas or Arkansas probate court, which reviews the executor’s financial assessments and is empowered to order the liquidation of estate assets or the repayment of certain debts.
However, not all assets are afforded the same levels of protection—or lack thereof—during probate proceedings.
Estate Assets Exempted from Debt Repayment
In Texas and Arkansas, certain kinds of assets are exempt from creditor claims, even when the value of a creditor’s claim outweighs that of the entire estate:
- 401(k) accounts with a designated beneficiary
- Individual retirement accounts (IRA) with a designated beneficiary
- Life insurance proceeds with at least one surviving beneficiary
When Creditors Can File Claims Against a Deceased Person’s Heirs
Estate heirs and beneficiaries could, under very limited circumstances, be held individually or jointly liable for a deceased person’s outstanding debts. You may be responsible for repaying a relative’s debt if:
- You cosigned a loan. As a co-signer for the decedent, then you’re most likely liable for repayment.
- You’re a joint account holder. You’re typically required to repay debt held in a joint account, even if the deceased co-owner accrued the debt or was principally responsible for the debt’s repayment.
- You’re the executor. Estate executors have to deal with estate debt by default. However, figuring out how to assess creditors and reallocate estate assets for repayment is challenging. If an estate faces claims that threaten its solvency—or threaten heirs’ inheritances—you may need to consider hiring a probate attorney or probate litigation lawyer.
- You’re the surviving spouse in a community property state. Arkansas has community-type laws, but it’s not a community property state. Texas, on the other hand, has typical community property statutes. Under Texas’s community property law, surviving spouses may be forced to relinquish certain jointly-held property to pay the debts of their deceased partner.
If none of these scenarios apply to you, then you’re almost never individually liable for the repayment of the deceased’s debt. Unfortunately, heirs and executors alike are often forced to contend with frivolous creditor claims. Unlawful as it may be, collections agencies frequently harass executors, heirs, and other family members over debts that cannot be legally collected. To fully protect your legacy for who you intend it to benefit, schedule an Estate Plan review today with Ross & Shoalmire.
