June 2010-Nothing can concentrate someone's concerns about money owing to them than the debtor passing away. The frantic telephone call from the creditor usually ends in the same question: "Can I collect?"
In general terms, the debts of the deceased become the obligation of the estate to pay. As when the debtor was alive, payment of debts is limited to the ability of the estate to find the cash. If you are the executor of an estate which owes more than it has in assets, you must be very careful in how you treat creditors. Some creditors have a secured or superior interest such as mortgage holders or others with secured liens against property. The taxman needs to be paid in full unless you can negotiate reduced payment (and get the Agreement and Release in writing). All other non-secured creditors must be treated equally. As long as an executor is careful in managing the estate, the executor will have no personal liability. Advertising for debts in an estate is an essential step.
Many a contract carries the words in which the debtor binds his "heirs, executors, successors, and assigns". This statement usually passes an obligation on to the estate to honour the debt. If a creditor has not been paid or is not satisfied with the arrangements for payment from the estate, the creditor must sue the estate within two years of the date of death.
An executor must remember that not all estate assets are available to satisfy debts. Often the matrimonial home is held "as joint tenants" between spouses. Provided there is no registered lien against the property at the time of the debtor's death and the joint title holder has not guaranteed the debtor's debts then that property passes to the surviving joint tenant, free of all debt obligations.
If you are an executor of a debt-ridden estate or someone trying to collect from an estate, you'd best get sound legal advice.