CNBC recently ran an article entitled This is what happens to unpaid debts when a person passes away. The article cites several financial planners who suggest that debts do not have to be paid. This is a common misconception. So what actually happens to unpaid debts when a Texas resident passes away?
About Probate in Texas
The term “probate” describes the process of wrapping up someone’s affairs when they die. It involves gathering the decedent’s assets, notifying creditors of the death, paying unpaid debts, and then making distributions to heirs or beneficiaries. Note that this list includes paying the then unpaid debts.
The rules for the probate process are set out in the Texas Estates Code. The Code also describes what type of property is subject to probate. This so-called probate property includes assets the decedent owned at death.
Everything that is not probate property, is nonprobate property. Nonprobate property includes certain multiparty bank accounts and accounts and real estate that pass by right of survivorship. It can also include community property.
Before moving on, let’s address the idea that nonprobate property is not subject to creditor claims. This is not necessarily true. The Texas Estates Code says that the personal representative can recoup most nonprobate property to pay creditor claims. But Texas law does not obligate the personal representative to do so. The courts in Texas have generally said that the personal representative does not owe a fiduciary or other duty to the estate’s creditors.
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