What happens to balances owed when your non-paying customer dies during the debt collection process? How do you enforce your right to get paid?
The answer depends on whether your non-paying customer was an individual, sole proprietor, or closely held business, compared to an officer of a corporation with more than one officer. Here’s why.
Individual Liability
Generally, an individual is responsible for their debt. Liability does not transfer to another person unless there is a co-debtor, a personal guarantor, or someone else liable for the debt by operation of law (i.e., spouse, parent, or guardian).
When an individual owes money and passes away, they may not leave assets sufficient to pay off their debt. Some assets may pass outside of someone’s estate or administration (if they died without a will), which means they cannot satisfy the amount owed to you, the creditor.
Take, for example, real property owned jointly by husband and wife. The property will, by operation of law, pass to the surviving spouse and is not considered part of the estate. Life insurance proceeds do not pass through the estate either. They pass to the beneficiary and therefore are not assets you can use to satisfy your claim.
Bank accounts, brokerage accounts, and other investment accounts without named beneficiaries or joint owners, as well as real property or co-ops with title in the decedent’s name, cannot be transferred without the aid of Surrogate’s Court. These are examples of assets that can be marshaled and liquidated to satisfy the claims of creditors. These types of assets will need to pass through an estate or administration.
There are steps you must take to secure your position as a creditor. Filing a proof of claim against the estate and serving the attorney for the estate or administration and fiduciary must be done within the required time frame.
Death During Litigation
But what happens if your non-paying customer dies during litigation? Once you learn that they have died, you cannot proceed with any litigation, arbitration, or mediation.
This remains the case until an administration or an estate has been filed with Surrogate’s Court and the process is underway. Once accomplished, and assuming it makes sense to continue with the litigation as there appear to be assets to satisfy a claim, an application would be made to substitute a representative of the estate (or administration) in place of the now-deceased debtor.
Death After Judgment
You cannot execute on a judgment entered against an individual who has died. If the judgment was docketed as a lien against real property, a home, condo, or investment property in the decedent’s name, your lien continues. You cannot take any affirmative steps to enforce a money judgment in state court. You will need to look to the estate or administration for payment.
Corporate Liability
Absent fraud or wrongdoing, liability does not attach to the individual officer that you dealt with. Liability attaches to the corporation. Therefore, the status of an individual officer does not affect your ability to collect from a corporate client.
Take, for example, our client who had litigation pending against a corporate client. The principal had died; however, there were other officers and employees, and the company continued operations. A judgment was entered against the corporation, and we were able to collect the full amount of the judgment. The fact that the individual officer passed away had no impact on our client’s ability to enforce their judgment.
If you have a debt collection matter you need assistance with, contact Frank, Frank, Goldstein and Nager. We have the experience that pays.
