Dealing with creditors in California after someone dies

How to handle creditors in California during probate

• After your loved one dies, you will need to inform creditors of their death. From there, creditors have a time limit to submit claims and you will have to respond within a certain time frame.

• Overall in California, creditors have only one year to collect on a debt.

• In general, you cannot inherit someone else's debt. But since California is a community property state, when one spouse dies, the other is responsible for those debts.

• Debts will be paid with estate funds in legally mandated order during the probate process.

• If funds run out before lower-priority debts are paid, those debts will not be collected.

When most people pass away, they leave behind at least a few debts. Or, in some cases, many debts. Unfortunately, their debts are not forgiven when they died—but no matter what aggressive creditors tell you, you cannot personally inherit your loved one’s debt.

California is a community property state, however, so spouses generally become full owners (and take on full debt responsibility) of assets like property. But otherwise, debts will be paid with estate funds in a prescribed order as part of the probate process.

Keep in mind as well that in California, creditors only have a year to collect on a debt. So if hounding phone calls continue beyond that point, you can report them to the California attorney general's office and the Federal Trade Commission.

To begin the process of paying creditors according to state probate laws, you'll need to first alert creditors to the death of your loved one. Then, follow the timeline set out by California to resolve all debts your loved one left when they passed away.

Informing creditors that your loved one died

According to California Probate Law, the first step in alerting creditors that someone has passed away is by completing a Notice of Administration to Creditors (form DE-157).

The form should list both creditors and potential creditors who should be given the notice of the person’s passing.

Once the forms are completed, they should be put in an envelope with a Creditor’s Claim form.

Before they are mailed, someone other than the representative of the estate must complete the part of the form entitled Proof of Service by Mail, sign it, then mail it.

Creditors then have 60 days from the date on the form to file their claim, or four months from the date the estate was opened.

Once the claim is received by the representative or the executor, they can pay it or, if it doesn’t seem legitimate, they can dispute it. At that time, creditors have 90 days to file a lawsuit in order to collect their debt.

Paying off debts in order, as required by law

First and foremost, before you sit down to pay any debts, you must first get the approval from the court.

If you don’t want to wait for approval, the state of California allows you to petition the court to grant you (if you’re the representative or executor of the estate) full power so you can start the process quicker. If the request is granted, then you can start paying creditors right away. 

When it comes to paying debts, state law dictates the order that must be followed when paying creditors, starting with most important down to least important:

1. All debts that are owed to the state of California and/or the U.S.

2. Administrative expenses associated with the estate

3. Anything regarded as a secured debt: mortgages and loans secured by liens or deeds of trust

4. Funeral expenses

5. Any bills that remain due to an illness of the person who died

6. Family allowances

7. Wage claims (up to $2,000)

8. Unsecured debts (credit cards), as well as remaining general debts

Each category must be paid off before moving to the next one on the list. If the estate runs out of funds and has no more assets it can sell, then all other creditors will have to go without—unless they choose to take further action. 

Non-probate assets creditors can claim

If an estate doesn’t have enough to pay off all its debts, creditors can go about other ways of trying to be reimbursed.

In some cases, they will target assets that don’t solely belong to the person who passed away, which in most cases are not a part of the probate process. Examples include joint bank accounts, joint property, life insurance or retirement benefits, and property held in the name of a trust.

Because California is a “community property” state (in which property acquired during a marriage is presumed to be co-owned by both spouses), a widow or widower are held responsible for the debts on assets they co-owned with their spouse.

It doesn’t matter if the surviving spouse didn’t take out a line of credit or lease a car, if their name is on it, it’s a community asset and if there’s still debt on this asset, it’s known as a community debt.

According to California Probate Code, the surviving spouse is liable for the following debts of their spouse who has died:

• One-half of the community property that belongs to the surviving spouse (but not property that is exempt from collection under California law).

• One-half of the community property belonging to spouse who has died.

• The late spouse's separate property, but only if it doesn’t pass through probate.

However, if there is little to no community property, then the surviving spouse isn’t responsible for any debts. A creditor can’t expect to get anything back when there’s nothing there.

There’s also the fact that in California, creditors only have one year to collect on a debt. Once that year is over, they can no longer press or harass a living spouse for payment, which, in many ways, is a saving grace even if there is enough community property to cover the debt.

Can creditors claim your assets?

Yes—but only if you co-signed on the debt or are a co-owner based on California's community property laws, as detailed above. Another example: An adult child can inherit debt if their name is on a loan or credit cards that their parent had when they died. The remaining balance becomes that of the adult child. If the parent let the payments lapse and a debt was accrued, then that debt becomes the responsibility of the adult child.

However, non-community assets that belong solely to a surviving spouse are off limits. Similarly, creditors do not have the right to go after the assets of parents, children (for instance, child support), siblings, or any other family members.

If you and your loved one don’t have any community property or co-signed contracts, then when the estate has paid all it can, you don’t have to worry about being responsible for any unresolved financial issues that were left behind with your loved one’s passing.

While a massive amount of debt and a small estate may mean there will be nothing left for the heirs, it can be a relief to know that among the turmoil of the moment, being left with your loved one’s bills isn’t one of them ●