Dealing with Debts of the Decedent

Most often our clients are doing their mother or father’s estate. It can be anybody’s but throughout this article, I’ll probably be talking about mom or dad, so just understand that no matter what the relationship is to the person who’s passed away, this all operates the same way.

So let’s use a common scenario, your father has passed away, among the assets that you find is the house which still has a mortgage on it, there’s a car, and there are only a few payments that are left, your dad had a couple of credit cards, and he had an illness shortly before he died so some different medical bills are coming in. I’m asked all the time how do I deal with all this stuff? Do I have to pay for my own pocket and then get reimbursed later? What if there’s something that just can’t wait and I have to pay it now, what do I do then? We are going to break this apart.

I want you to understand the difference between something that will be lost if you don’t pay for it right now, as opposed to things that are left unpaid, simply will not matter. Almost always the dividing line is whether there is some kind of secure debt.

I don’t want to get into legalese with you here’s what it means; we all know that if you borrow money for a house there is a mortgage, well all a mortgage is is it’s a contract. It gets reordered its public record and it says to the borrower and the lender and to anybody else who cares to look that you’re agreeing to make these payments and if you don’t then I the lender can actually come and seize the house. So for the mortgage on a house or a car loan where it’s not a mortgage but it’s the same idea because it’s secured by the actual object for which the loan was taken, you want to keep those payments current because you want to avoid the loss of assets for the estate. Now if there is money readily available in the estate of course use that period. Okay, that’s not a hard one, if the estate is liquid and these things can be paid for then pay them out of the estate. It’s not uncommon that I have clients come up to us and say look I know that house has plenty of equity I don’t want to lose it but dad had almost no cash when he died, it’s not going to last for more than a payment or two.

Alright, if you are in a position where you can pay for these things out of your own pocket that’s great and if you can do it without causing yourself a financial crisis then you should. Here’s how it works in probate, anytime you lay out money that is a benefit to the probate estate you will be reimbursed from the estate at the end of probate.

So using the house as an example well when the house is sold were going to have some net amount of cash presumably a pretty good amount and whatever it is it should be more than enough to make you whole when we close probate so if your able to do that then do that. Now, mom’s car it’s going to be the same idea and I will tell you that cars tend to be a little bit trickier only for this reason. Usually, people who have car loans for whatever reason the cars depreciate a lot faster than the loans get paid down, and very frequently I have clients who say to me and say well you know the car is upside down I don’t know if it is even worth keeping. That is a little bit of a tough one here is how it works in practice if mom had payments that were left on the car and I’ll just make up some numbers to illustrate the point. There’s $25,000  worth of loan that remains to be paid but you don’t believe that this car is ever going to ell for more than $15,000 on its best day so we have a $10,000 difference that you have to deal with. It’s very tempting to say well I’m just not going to pay it because it doesn’t make sense this is upside down, the lender can come and repo the car, there is no loss because it’s gotta negative value anyway, why do I care? To be clear you are in no way obligated to use your own money to pay for this. So you may think the best thing to do I’m going to let the car go and it’s fine if you do that. If you can make the payments then you may wanna do it while you make a somewhat more reasoned decision about it and here’s why.

If the repo man does come out and takes the car then what’s going to happen is— and this happens almost every time I see a car— there is going to be a deficiency judgment.

You say on its best day that the car will sell for $15,000 and it very well may if somebody actually put some effort into selling the car but what the repo guys do is they take it to a car auction so when the car sells for $13,000 instead of there being a $10,000 difference there’s a $12,000 difference and the vast majority of the time these auto lenders will come back to the estate to made whole. Now again this is not you personally liable this has got to come out of the estate so if you don’t pay a penny on it that’s okay just understand if you have the ability and your thinking well I’d like to preserve as much of the estate as possible. Even though the car is upside down it may make sense to pay on it for a few months so you can do a traditional sale, maximize the value of it, and by maximizing the value on the car you minimize the deficit of the payoff to the lender. Here’s why this matters for the car and also we’re going to talk about debts now where there’s nothing that’s securing it. So I talked about dad having some medical bills because he was ill before he died.

Any sort of person who either provided services, selling goods, or there’s some sort of unsecured loan after your mom or dad died they’re almost certainly going to come out of the woodwork and say well now we want to be paid. Well once your letters have been issued then were going to sort the creditors’ claim process.

You need to let us know of every debt that you are made aware of. Here’s why it’s so important; when you tell us whoever the entity is, MasterCard, Amex, ambulance service, the doctor who helped my dad, the auto lender for my moms’ car, it doesn’t matter who it is for, all of them there’s the very same analysis were going to send them what’s called a creditors claim notice. California law is crystal clear on this subject, they have 60 days to respond and if they do not file their claim in that period they’re out of luck, they don’t get a second chance, they cannot come later. So we wanna make sure that we have flushed out all the creditors so we know who they are, we’ve given them a chance to respond because if they don’t they’re not going to get paid. This is not an academic discussion I have had this happen Manny times I’ve had this with banks, I’ve had this with auto lenders, I’ve had this with providers of medical services, there are those who just simply fail to respond in which case they’re completely out of luck or for a lot of the pros so the lenders in particular and the credit cards very often they will tell you that they will compromise the debt. This is really good news if you believe this is a valid debt, which is frankly for the vast majority of the time. I mean when you look at dads credit card bill and it says there is $6,000 that’s owed there’s no mystery to look at the last statement or two and see where that debt came from and you’ll know that’s a valid debt, these folks really paid for these things, your dad really didn’t pay his credit card bill this money is really owed. Well, when they offer to settle it for $5,200 or $4,800 we want to do that and we’ve got to do that through the creditors claim process because that’s what will nail this down for all time.

You should not pay any of these insecure debts out of your own pocket, there is no reason to do that at all that is payable from the estate. If the estate really has problems, if there is very little money in the estate on a net basis then we need to know that because we are then going to back to anybody who’s a creditor and tell them to look there’s just so many cents on the dollar that we can pay you and were going to show them.

We are going to show them the inventory and appraisal so they understand how little is in the estate to make clear to them a discount in which you get something is far better than getting nothing which is a possibility if they don’t want to come in and play ball. Now I’m going to wrap this up by discussing “What about the people who have advanced the money?” Any time you advance money for the benefit of the estate keep a record of it. Now what I mean by that is do yourself a favor and keep a written list, “what date did I pay this? Who did I pay it to? What was the amount? What was the purpose? So I paid Wells Fargo today’s date $1,000 it was a mortgage payment for the house” does not have to be complex it just has to be clear. Keep whatever documents that have proof of what you’ve paid so if there’s a mortgage statement keep a copy of the montage statement, you have a canceled check for making a payment keep a copy of that, for whatever the type of bill is. When we are coming to the end of probate when we are either filing a report on a waiver of account or a first and final account as part of that we’re going to tell the court you need to be reimbursed and then lay out a list of everything that you’ve paid for and we are going to explain to the court just what I asked you to keep a record of.

I have never had a client who has been denied reimbursement for something that they actually paid for for the benefit of the estate.

Now I just want to put one caveat on that. Now and again, it’s thankfully rare I have somebody who does something without coming to us first that’s questionable whether it was to their benefit or the benefit of the estate. If it was to the benefit of the estate I have literally never had a client who has been turned down. For those who are straddling the line sometimes, it’s a dicier proposition. If you’re not sure ask us, most of this stuff is very plain-vanilla, it’s very obvious if there’s an asset owned by the estate and you’re simply paying to maintain it then obviously it’s for the benefit of the estate so that’s how we deal with debts of the decedent.

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