Hard times have hatched a new breed of debt collectors with a specialty: harassing bereaved relatives and ex-spouses to pay debts incurred by the recently deceased on “moral” grounds, even when there’s no legal duty to pay.
David Jonah, 58 of Snoqualmie Falls, WA, prided himself on his meticulous handling of his credit card debt and always paid off his balance when the bill came.
In 2006, he went to the emergency room feeling ill and looking jaundiced. After some extensive tests he was told that he had undiagnosed liver cancer and only had 3 to 4 months to live.
Jonah had no more than $5,000 in the bank but he did have five credit cards with credit limits of over $20,000 each. Instead of fighting a war he would ultimately lose, he booked first class tickets to the Mediterranean and squeezed $80,000 in living into the next two months.
About a year later, a collection agency contacted his ex-wife to tell her she was on the hook to pay for the extravagant trip to Europe.
Not knowing what her rights were, she willingly agreed to a payment plan and ultimately paid off her ex-husband’s debts.
This story is not new. Debt collectors from around the country are swarming in on surviving relatives of those who do not rightfully owe anything once they have died.
The best estate plan ever drafted can go to waste if trustees and executors fail to shield the heirs from unscrupulous creditors looking for more than they deserve, experts say.
“Debt collectors have become increasingly aggressive and intrusive in recent years,” says Florida lawyer David Wolf.
Creditors who can’t recover from an estate — often because the substantial assets were held in trust — have gotten so desperate that their agents are harassing family members to get money they don’t even owe.
When their underhanded tactics succeed, they can channel thousands of dollars away from the rightful heirs, effectively circumventing the estate plan and the deceased’s ultimate wishes.
And since the Federal Trade Commission won’t do anything about it, it’s up to the estate planner or trustee to protect their clients’ families and ensure that their hard work isn’t wasted.
Crossing the line between debt and death
Death dissolves contracts, so someone who died owing money will generally not pass that legal obligation on to anyone except maybe a spouse.
If there’s money left behind after paying creditors, the heirs inherit it. But If the estate can’t cover all of the deceased’s debts, liability ends there.
Parents, children and other heirs are off the hook.
The problem is that the survivors don’t know that.
The rules aren’t well promoted and tend to get sidetracked on arguments over what’s community property and what’s not.
And since a lot of estate planning revolves around making sure assets pass on outside the probate system, this gives creditors a back door into life insurance policies, retirement plans — even trust funds — that would ordinarily bypass probate.
All they need is someone to write the check.
That’s why they train their agents to lean heavily on shame, guilt and misdirection at a time when your clients may already be feeling overwhelmed.
The FTC acknowledges that this is a grisly situation.
“Allowing debt collectors to contact the survivors and loved ones of recently deceased consumers will require them to respond to these arcane questions of law at a time when they find themselves in unfamiliar and unsettling territory, trying to sort through the finances and personal affairs of the deceased, while simultaneously trying to cope with their loss,” they say.
“A consumer in this vulnerable condition may mistakenly identify himself as the person with whom the debt collector should be speaking,” the regulators continue.
“Worse still, he may end up feeling as if he has an obligation — legal, moral or otherwise — to pay the debt from personal funds.”
And yet, shockingly, in July they gave debt collectors a green light to do exactly that — allegedly in order to save the bereaved the time and trouble of having to appoint an executor.
Only the debt collectors benefit
While the FTC seems to think it’s bending the rules to protect American families, it’s not clear who exactly will actually benefit from this.
The papers are already full of reports of poor widows spending their meager life insurance benefits to pay their husbands’ credit card bills.
In non-community-property states like Florida, there’s absolutely no excuse for that unless the widow actively co-signed the accounts, David Wolf says.
Would these women be better off if they had to appoint an executor to prove that they didn’t have the money to pay the bills? Maybe.
It’s unlikely it would make their situations any worse.
And for those who could afford estate planning services in the first place, there is absolutely no benefit, because there’s already an executor in place.
Tell your clients what they need to know
To avoid similar frustrations, executors and trustees need to sit down with beneficiaries and warn them that they’re fair game from opportunistic bill collectors and worse.
If they get a call about the estate, they should not claim any authority at all, even to open the mail. Instead, they should simply refer the caller back to you.
You’re the one who decides whether there’s money to pay any lingering obligations — and if there isn’t, you’re in a much better position to back it up.
The collection agents can threaten the reputation of the deceased as much as they like, but it’s not like they can hurt his or her credit score.
Your obligations are to the living.
Scott Martin, senior editor, The Trust Advisor.