Paying Debts After Death
Last week I heard someone say that they plan to run up their credit card bills before they die. I think the statement was made in jest. However, it gave me an idea to include the subject on a blog.
What happens to your credit card debts, car loan, mortgage and other debts when you pass away? One thing for sure is that they do not just go away. Let’s first talk about the different types of debt.
Types of Creditors
Secured creditors, e.g. car loans or morgages, can repossess the items to recover the amount they are owed. Unsecured creditors, e.g. credit card companies, have no property to seize. So, how does it play out?
Your executor (if you have a will) or personal representative (if you do not have a will) is required to give notice to the creditors that the debtor has passed away. Failing to provide timely notice can result in the executor/ personal representative being personally liable for the debts. The creditors have a specific amount of time to assert their claims against the estate.
Priority of Creditors
In Texas Estates Code Section 355.102, there is an order in which creditors are paid. Claims against the estate have the following order of priority.
- Funeral expenses and expenses of the decedent’s last illness. These claims are limited to $15,000 and the remaining will be treated as unsecured claims.
- Expenses incurred for safeguarding assets and administering the estate.
- Secured debts, to the extent it can be paid out of proceeds from the sale of the property subject to the mortgage.
- Delinquent child support.
- Texas State taxes.
- Claims for repaying of medical assistance from the State of Texas.
- Other claims, e.g. unsecured debt.
Was it Marital Debt?
The executor or personal representative is responsible for determining which property is separate property and which is community property. Credit card companies are unsecured creditors, but they will be able to recover the debt from the separate property of the deceased and the community property of the marriage, if there are any assets left after paying the higher priority debts.
The credit card company can also recover the debt from the person who co-signed on the account, such as joint accounts on credit cards. Even if the spouse did not sign up as a joint account holder, under Texas law, property acquired or purchased during the marriage is assumed to be community property. In return, both spouses are typically equally responsible for paying debts incurred during the marriage, regardless of whose name is on the account.
Protection for Spouse
If the credit card company attempts to recover from the community property, the surviving spouse can argue that the money spent was not for the benefit of the marriage but for the deceased spouse’s personal pleasure. Therefore, it was a separate debt and the surviving spouse is not responsible for it.
In the event the credit card company asserts claims against the community property, in Texas the surviving spouse does have some protections under the Texas Homestead liability protection laws. It prevents the forced sale of the home for the purpose of paying debts and judgments.
Protect Your Family
Although your will states who should receive your property, your executor or personal representative must pay the creditors first. This may require selling your property to pay your debts and could leave nothing for you to give to your family. To prevent your family from having to deal with the burden of your debt when you pass away, consider ways to pay your debt or protect your assets. Some ways include putting your property into a living trust or purchasing life insurance so your family will have money to pay creditors or live on if your property is taken or sold.
Contact the Law Office of Hugh Spires, Jr. at hspires@TexasWillsLawyer.com or 210-874-5700.