Debt after death is a widespread problem in the United States.
A large number of Americans believe they will still carry some form of debt after they die, meaning they are naturally worried about what this means for the estates they pass on. The numbers vary depending on the source.
According to a survey conducted by Policy Genius, a life insurance company, 46% of Americans believe they are going to pass debt onto their loved ones when they die. Debt.org believes the figure could be even higher – it reports that 73% of Americans will die with some form of debt, quoting an Experian database survey in December 2016.
Regardless of which number is correct, one thing is clear – there is a high possibility you will be dealing with the debt left behind by a loved one. That brings us to a big question. What can a debt collector do to regain the funds they are owed by a deceased debtor in Ohio? We provide the answers in this article, in addition to diving into your potential responsibilities as a beneficiary or executor of the deceased’s estate.
How Debt Collection Against a Deceased Person’s Estate Works
First, let us answer the obvious question: Are a person’s debts cleared once they pass away?
In Ohio, the answer is a simple “no.” Debt does not simply disappear upon somebody’s passing, which means that creditors can make claims against the deceased person’s estate. The intricacies lie in how those claims are made, with probate and your relationship with the deceased both playing a role.
Claims Made Before Death
Before a debtor’s death, a creditor can claim their estate more traditionally. For instance, a lawsuit could be filed – if warranted – that personally names the debtor in an effort to obtain a judgment that leads to a judgment lien. This lien is typically attached to a debtor’s real property once a ruling has been made against them. It is even possible that the lien could exist without the debtor being aware of it – many often only come up when the debtor tries to engage in any financial activity that requires a credit check.
But there is a catch.
A creditor seeking a lien must “perfect” that lien – which means they have filed it with the proper authority or agency – prior to the property owner’s death. Failure to do so means that they will have to satisfy any unsecured debts via claims made against the deceased’s estate.
Claims Made After Death
Assuming the creditor failed to secure a judgment lien before the debtor’s death, they have to file a claim against the individual’s estate. This claim must be presented to the executor or administrator of the state – which may be where you come in – and will allow the creditor to start the process of reclaiming the money owed.
However, there is another catch.
Under Ohio law, a creditor must make their claim against the deceased’s estate within six months of their passing. That claim also has to be made regardless of whether the estate has an executor or administrator appointed, as well as regardless of whether the estate has entered into the probate process. Failure to submit a claim within six months of the debtor’s passing essentially expunges the claim. As Ohio state law says: “No payment shall be made on the claim and no action shall be maintained on the claim.”
There are some exceptions to this rule, with most relating to contingent claims. However, the general takeaway is that creditors have six months to file a claim for repayment from a deceased debtor’s estate. The claim usually takes the form of a written filing in the Decendent’s estate in Probate Court or a letter from the debt collector to the executor or administrator of the Decendent’s estate outlining the nature of the debt and establishing the claim made against the debtor.
An important note to make here is that this six-month rule applies to unsecured debts only.
According to the Delaware County Probate Court, any secured claims – such as the previously mentioned liens – do not need to be presented to the estate of the deceased debtor for payment. Those claims carry over regardless because payment is sought directly from the asset providing the security against the debt. So, in the case of a mortgage lien, the creditor would be automatically entitled to payment upon the sale of the asset without making any additional claims against the deceased’s estate. The same applies to the claims made against a deceased debtor’s liability insurance.
The Probate Problem (for Creditors)
Let us assume that the debt is unsecured, meaning the creditor has to claim the deceased’s estate. There is a key aspect of this process for creditors collecting debts that could play in your favor as an executor or administrator of an estate:
The six-month period starts from the date of death of the deceased debtor.
That opens up some possibilities regarding probate. Some executors and administrators choose to delay the beginning of the probate period for six months, essentially attempting to force creditors to relinquish any claims they have on the basis that there is no structure through which they can claim the debt.
Though a viable tactic in some circumstances – such as when the debt is fairly small – this approach does not always work. If no one applies to open the deceased’s estate, or there is some other delay in the appointment of somebody to manage the estate, a creditor has the legal right to apply to the Probate Court to appoint a special administrator. That administrator would serve until the general estate fiduciary is appointed and would exist primarily for the creditor to officially file their claim against the estate. Of course, applying to a Probate Court takes time and comes with an expense, meaning the creditor will only use this option if the debt is substantial enough to justify the work involved.
Your Responsibilities When Dealing with Creditors Attempting to Collect Debts
It is clear that the state of Ohio has specific rules in place for how creditors can claim from a deceased debtor and their estate.
That brings us to you – what are your responsibilities in all of this?
The answer depends on your role in handling the deceased’s estate. As an executor or administrator, it is up to you to handle any legitimate claims made against the deceased’s estate before assets can be passed on to beneficiaries. Typically, this involves the sale of assets to fulfill the debt, after which the money left over is passed on. You may discover that the estate becomes insolvent during this process, meaning that the sale of assets does not amount to enough money to repay the deceased’s unsecured debts. If that is the case, you must report this insolvency to the court and apply for an order of insolvency. Creditors are not obligated to make any refunds on repaid debts in the event of estate insolvency.
Things are a little simpler for beneficiaries.
Assuming a beneficiary is not also responsible for administering the estate, they simply need to wait for the debt issues to be resolved. Ohio law does state that a beneficiary has a legal responsibility to return any assets – or proceeds from the sale of assets – in the deceased’s estate if those proceeds are required to pay a legitimate creditor’s claim. Thankfully, beneficiaries are not personally liable for the deceased debtor, meaning a creditor cannot claim against assets unrelated to the estate that the beneficiary owns.
Can a Creditor Sue You for a Deceased Person’s Debts?
Yes and no.
A creditor cannot legally sue a beneficiary, executor, or administrator of the deceased’s estate to claim any of those individual’s personal assets to repay money owed by a deceased debtor. They also cannot sue if their claim was rightfully rejected because they failed to file within six months of the deceased passing.
However, lawsuits become an option in one circumstance:
The estate has received the creditor’s claim within six months of the deceased’s passing and has rejected it. In these cases, the creditor has two months from the date of rejection to pursue further action on the claim, which typically takes the form of a lawsuit levied against the deceased’s estate. The same conditions apply here as with the six-month period – failure on the creditor’s part to continue the claim within the two-month window means they are forever barred from making further claims against the estate.
Work with an Estate Planning Attorney to Handle Creditor Claims Against an Estate
You now know what a creditor can do – and the limitations they face – when collecting a debt from a deceased debtor. You can also see that the entire process can become complicated, with probate applications and potential lawsuits involved.
It is in handling these issues that an estate planning attorney can help.
At the offices of Christopher M. Diedling, Attorney at Law, LLC, we help clients plan for the future by creating legally sound estate plans. We also handle probate and estate administration – both key tasks when dealing with a deceased person’s creditors. If you require assistance, feel free to call us at (513) 672-6122 or send us a message via our website.