A typical question I receive from families dealing with wrapping up the final affairs of a loved one is whether they are now responsible for the decedent's debts as survivors. Usually, the answer is no. In general, you only inherit the debt if you signed as a co-borrower to assume legal responsibility for it. When a person dies, his or her estate is responsible for paying the remaining debts. If there is not enough money in the estate to cover what is owed, then the estate is insolvent and the debts are extinguished.
While you might not be responsible for the debts, it certainly does not stop your inheritance from coming under attack. Under Michigan's probate laws, creditor claims are paid after fiduciary and attorney fees but before any distributions to heirs and devisees. Here is a look at how most claims against estates are handled.
- PRESENTATION OF CLAIMS: A personal representative has a duty to publish a notice to creditors giving notice that all claims must be presented to the personal representative and the court within four months of the date of publication. Creditors are generally required to pay a $20.00 fee and submit a proof of claim. If the creditor is known to the personal representative before publication, notice may be sent directly to the known creditor and he or she shall have one month after receiving notice or four months from the date of publication to submit a claim, whichever is later. If the personal representative fails to give notice to creditors as provided by law, then the creditor may submit the claim within three years after the decedent's death. Claims that are not submitted within the applicable time frames are barred. If the personal representative receives a claim, he or she has 63 days to send a notice of disallowance to the creditor or it will be considered to be allowed. If the creditor receives a notice of disallowance, he or she will have 63 days to commence legal proceedings against the personal representative.
- PRIORITY OF CLAIMS: According to MCL 700.3805, if an estate has insufficient funds to pay all the claims and allowances in full, the personal representative shall make payment in the following order of priority:
- Costs and expenses of administration
- Reasonable funeral and burial expenses
- Family allowance
- Exempt property
- Debts and taxes with priority under federal law
- Reasonable and necessary medical and hospital expense of the decedent's last illness, including the compensation of persons attending the decedent
- Debts and taxes with priority under other laws of this state
- All other claims
- SECURED DEBTS: If the decedent has a loan that is guaranteed by collateral, the creditor is not required to file a claim to protect its rights. Collateral is an asset used to secure loan such as a house for a home mortgage or a vehicle for a car loan. If the estate defaults on the terms or payment of the loan, then the creditor can seize the property. Estate property that is encumbered by a secured loan can affect the ability of the beneficiaries to inherit it unless the loan is paid or the debt is assumed by the beneficiary.
- MEDICAID ESTATE RECOVERY: Federal law requires state Medicaid programs to seek recovery from the estates off decedents who have received benefits from that state's Medicaid program. In Michigan, recovery will be deferred as long as the decedent's spouse is living or child who is less than 21 years old or is permanently blind or permanently disabled. The personal representative may also make an application to defer recovery if it will result in an undue hardship.
- ESTATE TAXES: Beginning January 1st, 2018 and ending December 31st, 2025, federal law exempts $11 million ($22 million if married) from estate taxes for decedents who pass away in that time frame. The maximum statutory rate for estate assets above the exemption amount is 40%. Although very few estates will be subject to this estate tax, it is nevertheless paid ahead of any inheritances to beneficiaries. Michigan does not currently have an effective estate or inheritance tax.
- WHEN IS A PERSON RESPONSIBLE FOR A DECEDENT'S DEBTS?: There are some limited circumstance where families may be on the hook -
- That person co-signed the obligation
- That person is the decedent's spouse living in a community property state
- That person is the decedent's spouse and is required under another state's law to pay that particular debt if applicable
- That person is the personal representative of the estate and failed to comply with Michigan's probate laws to the extent that it triggered personal liability
As disturbing as it is, there are some unscrupulous debt collectors that will try to coerce family members into paying the estate's obligations by threatening collection or legal action. Generally, these threats are unenforceable and can even subject the creditor to legal action under the Fair Debt Collection Practices Act. The only person who is responsible for settling the estate's debts is the personal representative. If you are being harassed by debt collectors regarding the obligations of a deceased individual, do not even think about paying a single penny until you seek competent legal advice from an attorney on your rights. If you are a personal representative unsure of how to respond to a creditor claim, the attorneys at Kershaw, Vititoe & Jedinak PLC can help you navigate the complicated probate process and ensure that you are being treated fairly and in compliance with state and federal law.