What happens to debts after you’re gone? There’s two ways to look at that question: (1) debts that are owed TO you, and (2) debts that are owed BY you. Are either type still enforceable after your death?
Debts owed TO you
Let’s start with debts that are owed to you, in other words, where you are the creditor and someone else owes you money. The California Probate Code gives your personal representative wide authority to enforce and collect money owed to your estate. For example, Probate Code section 9820 gives the personal representative authority to commence a lawsuit “for the benefit of the estate.” That broad language covers a wide array of potential claims you may have, including enforcing your creditor rights.
Under Probate Code section 9830, a personal representative is given broad powers to compromise or settle any claims either against your estate or in favor of it. The personal representative can also extend, renew, or modify any obligation owed to the estate. In short, the personal representative can do anything you could have done while alive to enforce your claims. The only limit is the applicable statute of limitations. For example, if you have a claim based on a contract that is breached you only have two years in which to sue on an oral contract, or four years in which to sue on a written contract. Those same time limits still apply to your personal representative where they are the one commencing the lawsuit. So your personal representative does have to act within the timeframe set by law. But so long as that timeframe applies, the personal representative has free reign.
What if you do not have a probate estate opened in your case because you created a Trust prior to your death? No problem, the Trust has a host of powers listed in it that include many of the same powers discussed above. So whether you are dealing with a probate estate or a Trust, the person in charge has the power to enforce claims owed to you even after you die.
Debts owed BY you
Now comes the harder part, debts owed BY you. It’s not harder for you, but rather harder for your creditors. Debt collection is NOT a two-way street. The timeframes and powers your executor or Trustee have to collect debts owed to you are not enjoyed by your creditors—people to whom you owe debts. Why? It all boils down to finality.
The law wants your estate to be final as quickly as possible. That means creditors must act fast to collect a debt against your estate. First, they must submit a creditor’s claim in your probate estate either within four months after a personal representative is appointed or within a year of your death, whichever occurs first. And these timeframes apply regardless of whether the creditor knew or your death or not!
If your estate does not require a probate estate to be opened because everything is passing under a Trust, the creditor still must open a probate estate for you and file a creditors claim as required under Probate Code sections 9000 through 9350.
As for the one-year requirement, that is found in Code of Civil Procedure section 366.2, which mandates that all claims against a decedent must be filed within a year of the decedent’s death. Failure to do so will forever bar the creditor from collecting on the debt.
These quick time bars are meant to close the estate administration as quickly as possible, and they leave no room for claims being brought later in time. If you miss the deadline, you’re done…end of story.