Collecting Debt From Those Who Have Died: FTC Weighs In

Recently, the Federal Trade Commission (FTC) announced guidelines to help clarify what debt collectors can do to try to collect a debt owed by a deceased person. The FTC says the new guidelines aim to balance collectors’ need to try to collect from the estate—if there is one—with protecting relatives or other survivors from being pressured to pay debts for which they aren’t legally responsible.

However, to truly understand the new guidelines and why they were necessary, you first need to understand the traditional process for paying the debts of someone who has died, how that process has changed over the past several decades, and the problems those changes have created.

Probate Basics

It used to be that when someone died, an expensive and time-consuming court process called probate was initiated, which was managed by the deceased’s executor (called an administrator in some states). During probate, debt collectors (as well as creditors) filed claims with the probate court asking to be paid from the assets in the deceased’s estate, and the executor paid as many of the valid claims as possible out of the estate.

An estate is simply all of the assets that someone owns at their death. Certain debts and taxes (if any) must be paid from the estate. Whatever is left is distributed to beneficiaries, heirs or survivors. However, certain kinds of assets are not subject to the claims of debt collectors, or creditors, because they don’t go through the probate process and instead pass directly to the deceased person’s beneficiaries. Examples include joint assets, the proceeds from a life insurance policy naming a beneficiary other than the estate, or most retirement accounts.

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Over the past couple of decades, most states have instituted cheaper, quicker, more informal probate processes and they’ve also expanded the kinds of people who are entitled to pay the debts during these processes. In other words, someone other than an executor may be responsible for paying them when an estate does not go through the traditional probate process. Also, many states have begun exempting very small estates from having to go through probate at all. Instead, these states let someone called a personal representative (in some states this person may have a different title) to settle the deceased’s estate—including paying his debts—through a non-court process.

The problem with these less formal processes is that it’s not always obvious to debt collectors whom they should contact to try to collect on a debt owed by a deceased person. As a result, many collectors cold call the deceased’s relatives to find out if one of them is handling the affairs of the deceased, and some of those collectors leave the relatives with the impression that they have a legal or moral obligation to pay the debt of their dead loved one, when they do not, or they try to pressure the relatives in other ways to pay the debt.

“If someone dies and there is no formal process, it can get pretty wild,” warns Brad Wiewel, a board certified estate planning lawyer with The Wiewel Law Firm.

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Who Is Legally Obligated to Pay the Debts of a Deceased Person?

Despite what some debt collectors may want you to believe, if one of your family members dies, with a few exceptions, you are not obligated to pay his debts. In other words, if there is not enough money in your family member’s estate to pay everything that he owes, the debts don’t get paid.

But there are exceptions. If your spouse dies and the two of you had outstanding joint debts at the time of his death that are not paid off by his estate, then you are legally obligated to pay the debt. Also, if you and your deceased spouse lived in a community property state (Alaska, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin), you may be legally obligated to pay his outstanding debt, even if you did not co-sign for it, assuming the debt was incurred during your marriage. There are also some debts, like medical debts, that spouses may have to pay, even if they don’t live in a community property state. If you are unsure as to whether or not you are responsible for paying the unpaid debts of your deceased spouse, talk to an estate planning or probate attorney.

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The Federal Fair Debt Collection Practices Act Still Applies

It’s important to note that if you are responsible for paying the debts of your deceased spouse, or if you are the individual who is responsible for paying the debts of a deceased person who is not your spouse, you are still protected by all of the provisions of the federal Fair Debt Collection Practices Act (FDCPA), and by any laws in your state that may apply to debt collectors. That means you are entitled to have a debt verified in writing by a debt collector, the debt collector is prohibited from harassing or threatening you or from contacting you at unusual or inconvenient times or places—late at night or very early in the morning. Also, you have a legal right to send the collector a cease contact letter. If you are not responsible for the debts of your deceased relative, then the debt collector would not be allowed to pursue you for the debt.

[Infographic: What To Do If A Debt Collector Calls]

Image: meddygarnet, via Flickr.com

What the New FTC Policy Does »

What the New FTC Policy Does

The FTC’s new policy clarifies a number of issues related to the collection of debt from the estate of someone who has died, and also clarifies when the FTC will take action against a collection agency for contacting individuals other than those that the Fair Debt Collection Practices Act (FDCPA) specifically says can be contacted about a debt owed by a deceased person. Additionally, it tells collectors how to go about trying to identify and find the individual who has the authority to pay a deceased person’s debt.

Keep in mind, the FTC’s guidance only applies to debt collectors covered by the federal Fair Debt Collection Practices Act. It does not apply to creditors attempting to collect their own debts. In those cases, state laws may offer additional protections.

[Resource: 11 Ways A Debt Collector May Be Breaking the Law]

Here are highlights of some of the most important points in the new policy issued by the FTC:

• Although the FDCPA says that debt collectors can only contact the spouse, parent (if the deceased is a minor), guardian, executor or administrator of a deceased person about a debt owed by a deceased person, the new policy says that the FTC will not take action against a debt collector who communicates with some other person who has the authority to pay the debts of the deceased out of the deceased’s estate.

• When a debt collector does not know who has the authority to pay the debts, the collector may contact others to try to identify who that person is. However, when he does, the collector is not allowed to discuss the debt with others. He can state that he is seeking to identify and locate the person with the authority to pay any outstanding bills owed by the deceased person out of his estate, but he can’t go into any more detail at that point.

• Once a collector has identified the person responsible for paying the debts of the deceased, the collector may communicate only with that individual about the debt he wants to collect.

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• When a debt collector contacts the person with authority to pay the deceased’s debts, the FTC suggests that the collector make it clear to that individual that she is not personally liable for the debt the collector wants paid.

• A debt collector should not ask questions about the assets in the deceased’s estate in an effort to mislead the person with the authority to pay the debts into believing incorrectly that those assets are subject to the collector’s claim. Once the collector has reason to believe that a particular asset is not part of the estate, he should stop asking questions about those assets.

• Finally, in determining whether a collector gives anyone the impression that they are personally liable for the deceased’s debts, the FTC says that it will consider whether the collector obtained an acknowledgment when the first payment on the debt was made that, if appropriate, the person understands that he is obligated to pay the debts of the deceased only with the deceased’s assets, and is not legally obligated to use his own assets—including those that may be jointly owned with the deceased—to pay the debts.

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Dealing With Debts of the Deceased »

Dealing With Debts of the Deceased

If you are getting calls from creditors or collectors about the debts of someone who has died, what should you do?

1. Understand whether you are personally liable. Did you cosign the loan? If not, you are probably not responsible unless the deceased was your spouse and you live in a community property state (see above). There are exceptions, of course, such as medical debts incurred for a  minor child, or in some states, a spouse.

2. Identify who will handle claims from creditors. If there is a will or trust that identifies an executor, refer the creditors or collectors to that person. If no one has been appointed to administer the estate, then typically “the creditors become the executors,” explains Wiewel. “What happens is the court issues letters of administration that allow the executor to take to the (financial) institutions (holding assets) to request the money.”

[Resource: 5 Questions to Ask Before Using Retirement Funds to Pay Bills]

3. Find out whether there are assets in the estate that creditors can try to go after. Get legal help if you are not sure what assets belong to the estate, and of those, which are safe from creditors. A board certified estate planning attorney may be your best ally here. “Sometimes we have had cases where there is some property, some debt, and we will write creditors and tell them this is basically an insolvent estate and they have to sue if they want to get money,” Wiewel says. Find an attorney at WealthCounsel.com or NNEPA.com.

4. Avoid spending money that may belong to the estate until it’s settled. Don’t pawn mom’s jewelry or empty her safe deposit box until everything’s been taken care of. The last thing you want to do, Wiewel warns, is to be sued by a creditor after you’ve spent the money.

5. If a debt collector threatens or harasses you over the debt of someone who died, or even implies you have a moral obligation to pay the debt, complain to the FTC or talk with a consumer law attorney. Those threats may be illegal.

Are you being hounded for the debt of someone who has died? Share your story in the comments section.

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