People often engage in transactions that result in money being owed to them, such as loaning money to a friend or business partner or renting a house to a tenant. But what happens if someone passes away before they receive the money owed to them? Can someone else collect these debts? If your loved one has died and you think they were owed money at the time of their death, keep the following information in mind.
Does the Debt Die with the Person?
The fact that someone dies does not mean that the outstanding debt owed to them disappears or is no longer owed. The debt survives the death of the creditor and is then owed to the deceased creditor’s estate. In fact, a debt that is owed to the estate is considered an asset (i.e., money and property) of the estate. The estate is entitled to collect the debt as part of the probate process that culminates in the distribution of the deceased person’s money and property to the beneficiaries named in their will or to the beneficiaries designated by state law if the deceased person did not have a will. Similarly, if the debt is owed to the deceased person’s trust, the trust’s right and obligation to collect the debt continues after the trustmaker’s death.
Who Can Collect the Debt?
Before anyone can act on behalf of a deceased person’s estate, they must be appointed by the probate court. If the deceased person had a will, they probably named someone they trusted to act as their Executor. If the deceased person did not create a will, a person who is given priority in their state’s probate law, generally a family member, can petition the court to name them as the Administrator of the estate. Once appointed, the Executor or Administrator of the estate is authorized—and has a duty—to act on behalf of the estate to collect the debt. Similarly, if a debt was owed to a deceased person’s trust, the successor Trustee has the obligation to try to collect the amount owed to the trust.
How Can an Executor or Trustee Discover If the Deceased Person Was Owed Money?
If the Executor or Trustee is the deceased person’s spouse, they may be very familiar with the assets owned by their deceased spouse, including how much money their spouse was owed and who owed it, but a non-spouse Executor or Trustee (such as an adult child or family friend) may be less knowledgeable about the assets owned by the deceased person. All executors or trustees should examine the deceased person’s important papers and financial records to determine if there is any evidence that money was owed to the deceased. Optimally, there will be a written loan agreement, mortgage document, or other contract that provides clear evidence of both the existence of debt and the terms of repayment. However, even if there is no formal contract, other written evidence—for example, an email or even a text message demonstrating that someone owed money to the deceased person—can be used to establish the existence and terms of the debt. Alternatively, if the deceased person had records, books, or canceled checks showing the existence of a debt and that someone was making regular payments to them, this documentation can be used as evidence for the executor or trustee to establish the existence of a debt. Although written evidence is considered more reliable, the trustee or executor may also rely on witnesses who heard the deceased person and the debtor discussing a loan or other business transaction to establish the existence and terms of the obligation. Similarly, debtors themselves may make statements to the trustee or executor acknowledging the debt.
What Happens After the Debt Is Discovered?
The executor or trustee who discovers that a debt was owed to the deceased person should first ascertain if there are any amounts outstanding, that is, amounts that were due at the date of death. For example, consider a situation in which Bob made a loan of $5,000 to his friend Julie, who was obligated under the loan agreement to make monthly repayments of $250 on the fifteenth of each month until the loan was repaid in full in December 2024. If Bob passes away on January 16, 2024, the executor would need to determine if Julie was current on her payments, collect any monthly payments she owed at the date of Bob’s death (including interest), and monitor future payments.
Once the executor or trustee is aware of a debt that is owed to the deceased person’s estate, they should provide a formal written notice to the debtor that the deceased person has passed away and the date of death, that the estate is their new creditor, and that future payments should be made to the estate via the executor or trustee. The notice should also include the executor or trustee’s name, address, and any other information needed to facilitate payment of the debt. The executor or trustee should make efforts to collect any past due amounts and to facilitate the payment of amounts that will be due in the future, for example, rental payments for the remaining term of a lease agreement that extends beyond the date of death.
What If the Debtor Will Not Pay the Amount Due?
Although an Executor or Trustee will initially attempt to collect a debt by contacting the debtor and requesting payment of the amount due, if those collection efforts are not successful, they may need to seek the help of a lawyer to send a demand letter to the debtor or file a lawsuit on behalf of the estate to collect the amount owed.
We Can Help
If your loved one has passed away, we can help guide you through the probate process if you are the executor of their will or wish to be appointed as the administrator of their estate. Likewise, if you are the successor trustee, we can help you administer your loved one’s trust.
One of the important duties of an executor or administrator is to collect, protect, and prepare an inventory of all of the assets in the deceased person’s estate, including the debts owed to them, so they can be distributed to the beneficiaries of the estate. Trustees similarly have a duty to maintain records relevant to and to collect debts owed to the deceased person’s trust. Seeking help from an experienced estate planning attorney can help put your mind at ease by helping ensure that you fulfill all of your duties. Nielsen Law PLLC provides family-focused estate and business planning to individuals and families in Austin, Round Rock, Cedar Park, and the Central Texas area. For more information, and to learn about our firm, please contact us. We look forward to working with you.