What happens when a debtor dies with unpaid debt in California?

What happens when a debtor dies with unpaid debt in California?

On Behalf of | Oct 12, 2023 | Firm News

Businesses owed money by an individual may need to spend years collecting on that debt. Hospitals might enter into payment arrangements with someone on a fixed income, for example, that will require many years of payments to complete.


Most organizations that engage in collection activity or offer payment plans recognize that receiving payments every month, even if they are small compared to a debtor’s overall balance, is better than collecting nothing at all. Unfortunately, particularly if the party who owes the money has health challenges or accumulated a substantial amount of debt, they might potentially die before they finish paying their debt in full.


How can a business in California potentially recover a debt owed by someone who has died?


Responsibility for the debt will pass to the estate: someone who has died cannot control assets like financial accounts or real property. What they owned in their own names at the time of their passing will become the property of their estate. The financial obligations of an individual will also pass to the estate. Creditors can then seek repayment with whatever assets someone still had in their name at the time of their death. Every state has a slightly different process for creditor claims. In California, the personal representative handling estate administration has the responsibility to communicate with creditors.


They will generally need to send a written notice to known creditors and will typically publish notice of the probate proceedings in the newspaper. Creditors can then bring a claim against the estate if the representative does not immediately pay them in full after determining the final balance of the account. Probate claims brought by creditors can lead to full or partial repayment depending on the assets in the estate.


The representative will usually need to use any and all estate resources to pay off debts before distributing anything to the selected beneficiaries named in the estate planning paperwork. If there are not enough assets to pay every creditor in full, the representative will need to pay them in order of priority, with certain debts, including probate costs and taxes, taking priority over others.


Provided that the professionals working in the collection or accounting department of a business understand the probate debt collection rules of a particular state, they can potentially seek repayment from someone’s estate when they die with a balance still owed. Learning more about how California protects the rights of creditors may help organizations comply with the law while seeking the repayment they’re owed.