Don't Make a Grave Mistake

My mother passed away owing debts to her hospital and lenders. What's the best way to negotiate with her creditors?

Losing a parent is difficult enough without also having to worry about paying off his or her bills. The good news: In most cases, children aren't responsible for the tab.

While the rules vary by state, children will generally be held liable only if they cosigned the account or signed an agreement at the hospital accepting financial responsibility for the bills, says Steven McDaniel, president of the National Association of Estate Planners and Councils.

Creditors can, of course, seek payment from the deceased parent's estate. Such matters are decided in probate court. If there's a will, payments to creditors will come before any assets are distributed according to the terms of the will. If the parent didn't leave enough to pay their debts in full, the assets are distributed proportionally to creditors. For example, if the parent owes $100,000 to five creditors, but has only $10,000 in probate assets, each creditor will get just $2,000.

To get this process started, mail a certified copy of the death certificate to all creditors, along with a letter stating which probate court will accept claims on the estate. The creditors then have a set period of time -- usually four months to a year, as determined by state law -- to file an official claim asking to be paid.

The good news is that in many cases, creditors don't make collection efforts at all, says Steve Rhode, a money coach and founder of MyVesta.org, a nonprofit credit educational service. "It's not as cost-effective for them to invest time going after estates as it is just trying to collect from people who are still here," he explains.

Keep in mind, if a creditor decides to collect, it can only go after what estate planners call "probate assets," explains McDaniel. These are assets held in the deceased person's name that do not have beneficiary designations. For example, any life-insurance policies or retirement accounts naming you as a beneficiary are out of reach from creditors. The same goes for any joint bank or brokerage accounts.

"I could die a wealthy man with a whole lot of money in a joint account, and leave you $1 million in life insurance, and owe $50,000 to every credit-card company in the country," says McDaniel. "But if I have no probate (assets), the fact is the credit-card companies will never collect anything."

If you do decide to pay back some of the debts as a matter of goodwill, remember that you have all the negotiating power. "The creditors will be more than willing to get something instead of nothing," says credit expert Gerri Detweiler, author of "The Ultimate Credit Handbook." She recommends offering to settle for 10% to 25% of the balances due. If, by chance, you get a settlement offer from a creditor, just make sure it isn't manipulating you into taking on liability, by, say, encouraging you to transfer the account to your name. Better yet, she suggests, consider making charitable contributions instead, so that the money is spent on a better cause and you can get a tax write-off.

If all of this seems too complicated, it might be best to consult a lawyer. The National Association of Consumer Advocates should be able to provide you with contacts in your area.