Debts of the Deceased
People often die with outstanding credit card bills, loan payments or other forms of outstanding debt. The only types of debts automatically forgiven upon the death of the debtor are federally backed student loans. In most states, however, these debts cannot automatically be assigned to a surviving spouse or other family members unless those debts were incurred through a joint account. Creditors do have the legal recourse to collect their outstanding debts during the court-ordered probate process.
Probate is the court process through which a decedent's estate is legally transferred to surviving heirs. This occurs whether the debtor passed away with a will or intestate, meaning "without a will." The probate process is administered by an estate representative who manages the decedent's assets after they are placed into an estate account. Although the exact process varies from state to state, an estate representative must satisfy all creditor claims on outstanding debts owed by the deceased person before transferring the remaining assets among the heirs. Joint accounts held by the decedent with his spouse are not subject to probate. Creditors have a window of opportunity during which to make claims against the estate, after which time new claims on the estate become null and void.
Community Property States
States that observe community property laws place more of the responsibility of satisfying a deceased person's debts on the spouse's shoulders. The nine community property states in America are Alaska, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. In these states, credit cards and other debt accounts opened during a marriage are considered joint accounts, even if they are solely in the decedent's name. Therefore, these debts become the debt of the spouse upon the main account holder's death.
Creditor claims that cannot be satisfied during probate are typically canceled in the other 41 states that don't observe community property laws. In these cases, creditors must file a Form 1099-C, "Cancellation of Debt," with the Internal Revenue Service. This debt cancellation is considered taxable income under IRS rules and is typically added to the final tax return for the deceased individual. Form 1099-Cs cannot be issued for forgiven loans that are less than $600.