Debt After Death: What Is the Statute of Limitations?

Debt doesn’t simply vanish when someone passes away, and that reality can create tough questions for families. If you’re currently managing a loved one’s estate, you may be wondering who’s responsible for unpaid balances. If you’re planning ahead, you may want to know how to keep your family protected.

This article will explain what happens to debt after death, how creditors handle it, and what steps you can take to prepare.

Table of Contents

1. What happens to your debt after you die?
2. Who is responsible for debts after someone dies?
3. What is probate?
4. Which debt gets paid first after you die?
5. Statute of limitations on debt after death
   1. Mortgages
   2. Car loan
   3. Credit card debt
   4. Personal loans
   5. Hospital bills
   6. Student loans
   7. IRS debt
6. How to protect your assets
7. Tips to organize your affairs in advance

What happens to your debt after you die?

According to a recent survey from Debt.com, 55% of people expect to die with debt. After someone dies, their debts and assets become part of their estate. This is the legal term or entity that represents what’s left behind after someone passes away.

If there is a will, the courts typically follow the instructions in the will, which will name an executor. The estate executor is the person who will handle paying off debts and distributing assets. According to the FTC, if there is no will, the court will appoint an executor to handle the estate.

Who is responsible for debts after someone dies?

By law, family members, such as children, are not responsible for repaying debt that is not in their name. Those who might be responsible for debts are cosigners on loans or a spouse who lives in a community property state.

Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin are community property states, according to the IRS.

If you’re dealing with debt from a deceased loved one, the first step is to inventory all the assets and liabilities. Using the resources and guidelines in this article, understand what you are working with first before taking any action!

What is probate?

Probate is a legal process that happens when someone passes away. This is when the court follows a standard procedure to appoint an executor for an estate, review and validate the will, and settle debts.

According to the IRS, the executor has several responsibilities during this probate process. They are the ones who inventory assets, notify creditors, pay off debts in a specific order, and then distribute any remaining assets to heirs. Usually, if an estate does not have enough assets to pay all its debts, lenders write off the remaining balance.

Which debt gets paid first after you die?

If someone has outstanding debt when they pass away, each state has laws that dictate which debts get paid first with any available assets. In general, the order of paying debts and other costs typically looks like this:

1. Funeral costs: Executors can use funds for reasonable funeral costs first.
2. Court and attorney fees and executor compensation: Next, probate involves court fees, attorney fees, and filing fees. Also, there are fees for the executor or estate administrator to manage the estate.
3. Taxes: The next priority is paying any taxes owed, including federal, state, and local taxes.
4. Medical bills: If there are any medical bills related to the death, such as a hospital stay or months of hospice care, those bills are paid next.
5. Secured loans: Secured loans are loans that are tied to an asset, like a mortgage. Lenders can foreclose on a home or a car if the payments stop, so that type of debt is the next priority.
6. Unsecured loans: Unsecured loans are debts not tied to an asset, like personal loans and credit cards. These are last on the list, but if there are no more funds available (also known as insolvent), these lenders will write off the debt.

Statute of limitations on debt after death

When someone dies, a public notice is typically filed by an attorney working with the estate or the state’s court system if the estate is in probate. This lets creditors know of the borrower’s death. After this point, lenders have a specific amount of time to request payment for debts owed, called the statute of limitations. Once this time frame is over, lenders cannot legally request debt repayment.

If lenders aggressively call you asking to repay a loved one’s debts, they are in violation of the Fair Debt Collection Practices Act, and you can report them to the FTC.

Ultimately, each state has its own probate laws and statute of limitations for different types of debt. However, here are some general guidelines on the most common statute of limitations for debt collection, organized by types of debt.

Mortgages

If a beneficiary inherits a house with a mortgage, they must continue to make payments or the lender can start foreclosure proceedings. Beneficiaries should also continue to make payments on second mortgages, like home equity loans or HELOCs, to avoid foreclosure.

Car loan

If an executor does not pay off a car loan, the person who inherits the car should put the loan in their name and keep making payments; otherwise, the lender can repossess the car.

Credit card debt

The statute of limitations on credit card debt collection varies by state, but typically, lenders have between three months and two years to request payment after someone passes away.

Personal loans

Personal loans are similar to credit card debt because both are unsecured loans. Like credit card lenders, personal loan lenders usually have three months to two years to make a claim on debt, depending on state laws.

Hospital bills

Usually, the estate pays hospital bills related to someone’s final illness. However, the Consumer Finance Protection Bureau explains that medical bills can be especially challenging for surviving spouses, and creditors can pressure widows or widowers to pay debts they might not owe. Speak with an attorney if you’re a surviving spouse who is negatively impacted by hospital debt collectors.

Student loans

Federal student loans are discharged upon death, but private student loan policies vary by lender.

IRS debt

IRS debt after death is a complex issue that warrants consultation with a qualified estate attorney if you have questions. The estate typically prioritizes paying federal taxes and IRS debt. The IRS has 10 years to collect taxes, and can put a lien against a property if the estate doesn’t pay IRS debt before distributing assets to the family.

How to protect your assets

According to the IRS, there are certain assets that don’t go through probate and are therefore protected from creditors. These include life insurance, burial policies, joint bank accounts, and certain retirement accounts.

Some, but not all, trusts can protect your assets, too. According to Nolo, putting assets in an irrevocable trust is one way to prevent creditors from accessing your assets. Speak with an estate attorney who is familiar with the laws in your state if you want to pursue that option.

Tips to organize your affairs in advance

If you want to organize your affairs and ease the burden on your family members after you’re gone, here are some tips.

As a certified financial planner, when I work directly with clients to plan their estates, we “inventory” their assets, accounts, and any financial resource they have now or in the future. We review the named beneficiaries and look to those accounts that do not have beneficiaries. I also recommend a competent and credible estate planning attorney to begin working with. The attorney will review our work, ask questions, and begin to build a road map of documents to draft for my client’s family and loved ones.