What To Do When Someone Dies: Debts and Bills

Funeral planning ahead for debtFew people die with every bit of their financial affairs in order – even if they left a will or went through substantial funeral pre-planning. That’s because most Americans live on a delicate balance of money coming in, money going out, and money being moved to savings or insurance accounts. And when a loved one passes away, this balance doesn’t go with them. It is up to the dependents and beneficiaries to navigate the many different bills and debts left behind.

Before you pull out your checkbook or start panicking about how you’re going to cover all the immediate expenses, it’s important to learn your rights and responsibilities about paying bills when a loved one dies.

Solvent Vs. Insolvent Estates

Any adult who passes away leaves behind an “estate,” regardless of where he or she lived or how much money he or she left behind. The estate is the collection of assets, debts, and personal property acquired through a lifetime. If the estate is solvent, that means there is enough money (including saleable assets and life insurance) to cover the total amount of debts and bills, including any lingering medical bills acquired prior to death. An insolvent estate is one in which the debts are greater than the assets.

Part of our ongoing series:

What To Do When Someone Dies

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If the estate is solvent, it becomes the primary responsibility of the Personal Representative or Executor of the Will to pay the bills owed by the estate. An insolvent estate will operate much like a personal bankruptcy, in which creditors are ranked according to federal and state priorities, and paid in part or in full with whatever assets there are. In the cases of insolvency, the state of residence and the creditors owed share the bulk of the debt – not the family of the deceased, though this may vary depending on the type of debt. Having an insolvent estate also means any money (even that in an insurance policy or will) goes to creditors first, and family members can end up with nothing.

For spouses or family members who shared the finances of the deceased (such as a co-signer on a loan or someone who’s name was listed on the bank account), the disbursement of bills and debts is fairly straightforward. After showing proof of death, the account (whether a positive or negative balance one) becomes entirely your responsibility, and you must handle the bills accordingly. This means that if you share a credit card with your spouse, you are responsible for the debt if he or she dies, even if you didn’t spend any of the money.

Handling the Bills

Funeral planning with payments in mindWhile the account is still in probate (which means all the legal steps are still being worked through during the solvency/insolvency process), most people will go through the following steps:

Step 1) List all the liabilities of the deceased, up to and including:

• Mortgages
• Lines of credit
• Housing fees
• Property taxes
• Federal and state income taxes
• Automotive loans
• Student loans
• Personal loans
• Credit card bills
• Utility bills
• Phone bills

Step 2) Divide the liabilities into administrative expenses (bills that will continue to need payments through the probate process, such as a mortgage ) and final bills (bills that can simply be paid off in full once the probate is completed, such as income taxes). Administrative expenses will be paid by the Personal Representative or Executor of the Will out of any funds currently in the estate. If there isn’t enough money to pay them, the same individuals must contact the creditors for more information.

Step 3) Make decisions about maintaining payments. In many cases, the beneficiary of a specific item (say that Uncle Larry left you his car) can decide whether or not to take over the payments at this time. If you want to keep the car, you should make regular payments. If you don’t want to keep it, and no other beneficiary is interested, you can stop payments altogether. If you do make payments for these or any other bills, be sure
and keep a record of all the money you spent during the probate period. You may be reimbursed later out of the estate.

Step 4) Determine what can be sold. This is usually the responsibility of the Personal Representative, who must evaluate the bills to determine how much needs to be paid out of the estate. Selling items may be necessary to cover debts, even if you are entitled to that item by virtue of the will.

Step 5) Await a final judgment. Death and handling an estate are very much a legal process. Depending on the state you live in, the exact financial situation of the deceased, and the stipulations of the will and/or any other inheritances, you may end up with much less or much money than you expected—and it can take months or even years of processing before you know for sure. It is very important to get legal advice during this
time if you have any questions about how or if you need to pay bills during the first few weeks following the death of a loved one.

One of the big questions in all this legalese regarding probate and estate solvency is how and who is supposed to pay for the funeral. After all, a life insurance policy that will cover the expenses of the funeral is great…but not if it is tied up in an estate that has heavy debts elsewhere. Keeping funds separate for funeral expenses, whether by pre-planning the funeral or buying funeral insurance, can be a great way to avoid burdening loved ones when so many other bills and probate costs are up in the air.

Our next post in this series will be released on Tuesday January 18, 2011 and will be about grief resources available to individuals when a loved one dies.

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