Are Personal Loans Discharged at Death

David received a call from a debt collector just six weeks after his mother’s passing, demanding immediate payment on a personal loan she’d taken out five years prior—a loan he hadn’t even known existed. The estate’s assets were quickly being depleted by probate costs, and now this unexpected creditor claim threatened to leave his siblings with nothing. The cost? Not only the loan balance itself, but also the legal fees to defend against the claim, potentially exceeding $5,000.

As an Estate Planning Attorney and CPA with over 35 years of experience, I often encounter situations like David’s. The question of whether personal loans are discharged at death isn’t straightforward; it depends heavily on the loan’s structure, the borrower’s estate, and California law. A key advantage of working with an attorney who is also a CPA is understanding how debts impact the step-up in basis for inherited assets, potential capital gains implications, and the proper valuation of the estate.

What Happens to Debt When Someone Dies?

Generally, debts do not magically disappear upon death. They become a claim against the deceased’s estate. The estate’s assets – cash, investments, real estate – are used to satisfy those debts, in a specific order determined by California law. This process happens during probate, and creditors must follow a formal procedure to pursue their claims. Understanding this process is crucial for both executors and beneficiaries.

How Probate Creditor Claims Work in California

In California, probate creditor claims follow the formal claims system, as outlined in Probate Code §§ 9000–9399. Creditors typically have four months from the date of the Letters Testamentary being issued (the official documentation granting the executor authority) to file a claim with the probate court. The executor is legally obligated to review and either accept or reject each claim. Rejected claims can lead to litigation, significantly extending the probate timeline and increasing costs.

The Priority of Debts in California

California’s mandatory payment order dictates which debts get paid first. Probate Code § 11420 establishes the hierarchy, prioritizing things like secured debts (mortgages, car loans), funeral expenses, and administrative costs of the estate before unsecured debts like personal loans. Personal loans generally fall lower on the priority list, meaning they may not be fully satisfied if the estate lacks sufficient assets.

Personal Loans vs. Co-Signed Loans: A Critical Distinction

The treatment of a personal loan after death differs significantly depending on whether the deceased was the sole borrower or a co-signer. If the deceased was the sole borrower, the loan becomes an estate debt. However, if the deceased was a co-signer on a loan for someone else, the loan becomes immediately due, regardless of the estate’s status. This is a common source of confusion and potential financial hardship for heirs.

The One-Year Rule: Time is of the Essence

Regardless of whether a creditor files a formal claim in probate, they have a hard one-year deadline to pursue legal action against the estate. This deadline is established by CCP § 366.2, and it’s important to note that it is NOT tolled by the probate process. This means the clock starts ticking from the date of death, even if probate is ongoing. Failing to address a creditor claim within one year can have severe consequences for the estate and its beneficiaries.

Spousal Liability and Personal Loans

One frequent concern revolves around spousal liability for the deceased’s personal loans. California law distinguishes between community property debts (debts incurred during the marriage that benefit both spouses) and statutory spouse liability. Family Code § 910 and Probate Code §§ 13550–13554 outline these distinctions. Generally, a surviving spouse is not personally liable for debts incurred by the deceased prior to the marriage or debts incurred by the deceased during the marriage that solely benefitted the deceased. However, community property assets are subject to creditor claims, and the surviving spouse may be responsible for their portion of those debts.

Small Estates and Simplified Procedures

If the total value of the deceased’s estate is below the small estate threshold – currently Probate Code § 13100 = $208,850 for deaths on/after April 1, 2025 – a simplified probate process may be available. This can streamline the debt resolution process, but it’s still essential to follow proper procedures and adhere to the one-year rule for creditor claims.

What does a California probate court look for when interpreting testamentary intent?

In California, a last will and testament operates within a probate system that emphasizes intent, clarity, and procedural compliance. When properly drafted, a will does more than distribute property—it creates legally enforceable instructions that guide courts, fiduciaries, and beneficiaries through administration with fewer disputes and less uncertainty.

When a will is drafted with California probate review in mind, it becomes a stabilizing roadmap rather than a source of conflict. Clear intent, proper authority, and compliant execution protect both families and estates.

Controlling California Statutes on Estate Debts and Creditor Claims

• Debt Priority:
  
  California Probate Code § 11420
  
  Establishes the mandatory statutory order in which estate debts must be paid before any distributions to beneficiaries.
• Probate Creditor Claims:
  
  California Probate Code §§ 9000–9399
  
  Governs how creditor claims must be formally filed in probate and why informal demands, letters, or invoices are legally ineffective.
• Creditor Lawsuit Deadline:
  
  California Code of Civil Procedure § 366.2
  
  Imposes a strict one-year deadline from the date of death for most creditor lawsuits, which is not tolled by probate proceedings.
• Surviving Spouse Liability:
  
  California Probate Code §§ 13550–13554
  
  Limits a surviving spouse’s personal liability for a decedent’s debts to the value of property received under these statutes.
• Small Estate Threshold:
  
  California Probate Code § 13100
  
  Sets the $208,850 small estate affidavit threshold for deaths occurring on or after April 1, 2025.