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Must mortgage be paid off by estate?

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What is the name of your state? CA

Let's say there's a $80,000 mortgage loan and the homeowner dies. The homeowner has about $70,000 in an IRA and another savings account. The beneficiaries (the children) wish to keep the loan in place. The probate attorney says the mortgage must be paid off as part of the court-approved distribution.

Are there any other options besides taking out a new loan in the name of the beneficiaries and paying off the old loan? A new loan would be at a significantly higher rate.

Thank you very much for any help.
 


moburkes

Senior Member
What is the name of your state? CA

Let's say there's a $80,000 mortgage loan and the homeowner dies. The homeowner has about $70,000 in an IRA and another savings account. The beneficiaries (the children) wish to keep the loan in place. The probate attorney says the mortgage must be paid off as part of the court-approved distribution.

Are there any other options besides taking out a new loan in the name of the beneficiaries and paying off the old loan? A new loan would be at a significantly higher rate.

Thank you very much for any help.
If this weren't a hypothetical situation, we'd have an answer.
 

seniorjudge

Senior Member
What is the name of your state? CA

Let's say there's a $80,000 mortgage loan and the homeowner dies. The homeowner has about $70,000 in an IRA and another savings account. The beneficiaries (the children) wish to keep the loan in place. The probate attorney says the mortgage must be paid off as part of the court-approved distribution.

Are there any other options besides taking out a new loan in the name of the beneficiaries and paying off the old loan? A new loan would be at a significantly higher rate.

Thank you very much for any help.
This is covered by the Golden Rule.

He who has the gold makes the rule.

Don't ask us or your lawyer or the judge...ask the lender!

DUHH!!!:D
 
moburkes,

This is not hypothetical. I'm trying to help a family member who's dealing with a lot right now.

tecate and seniorjudge,

We were assuming that a lender would not carry a loan in the name of someone who's not living anymore. This was backed up by the family attorney. I'll pass along the suggestion to talk with the lender-- thanks.

Along with the golden rule, is there a general one regarding outstanding loans at the time of death? Must all debts be paid before any distribution takes place? Obviously in this case, that would mean all of the probate assets would go toward paying off the mortgage.

I appreciate the comments.
 

Zigner

Senior Member, Non-Attorney
Must all debts be paid before any distribution takes place? Obviously in this case, that would mean all of the probate assets would go toward paying off the mortgage.

I appreciate the comments.
Yes, debts of the estate must be satisfied before distributions take place.
 

tecate

Member
Please note Probate Code Sections 11640 and 11460 et. seq.:

11640. (a) When all debts have been paid or adequately provided
for, or if the estate is insolvent, and the estate is in a condition
to be closed, the personal representative shall file a petition for,
and the court shall make, an order for final distribution of the
estate.
(b) The court shall hear and determine and resolve in the order
all questions arising under Section 21135 (ademption by satisfaction)
or Section 6409 (advancements).
(c) If debts remain unpaid or not adequately provided for or if,
for other reasons, the estate is not in a condition to be closed, the
administration may continue for a reasonable time, subject to
Chapter 1 (commencing with Section 12200) of Part 11 (time for
closing estate).

11460. As used in this chapter:
(a) A debt is "contingent" if it is established under Part 4
(commencing with Section 9000) in either a fixed or an uncertain
amount and will become absolute on occurrence of a stated event other
than the passage of time. The term includes a secured obligation
for which there may be recourse against property in the estate, other
than the property that is the security, if the security is
insufficient.
(b) A debt is "disputed" if it is a claim rejected in whole or in
part under Part 4 (commencing with Section 9000) and is not barred
under Section 9353 as to the part rejected.
(c) A debt is "not due" if it is established under Part 4
(commencing with Section 9000) and will become due on the passage of
time. The term includes a debt payable in installments.




11461. When all other debts have been paid and the estate is
otherwise in a condition to be closed, on petition by an interested
person, the court may make or modify an order or a combination of
orders under this chapter that the court in its discretion determines
is appropriate to provide adequately for a debt that is contingent,
disputed, or not due, if the debt becomes absolute, established, or
due. Notice of the hearing on the petition shall be given as
provided in Section 1220 to the creditor whose debt is contingent,
disputed, or not due, as well as to the persons provided in Section
11601.


11462. Notwithstanding any other provision of this chapter, if the
court determines that all interested persons agree to the manner of
providing for a debt that is contingent, disputed, or not due and
that the agreement reasonably protects all interested persons and
will not extend administration of the estate unreasonably, the court
shall approve the agreement.
 
I appreciate the follow-up comments.


moburkes,

For some reason, there was a belief that the mortgage could be transferred or otherwise put into the names of the beneficiaries. This would allow the children to make the payments while also taking care of some other bills. There was no misconception that they wouid not be responsible for the loan.

tecate,

Thanks for the link. Good information.
 

moburkes

Senior Member
I appreciate the follow-up comments.


moburkes,

For some reason, there was a belief that the mortgage could be transferred or otherwise put into the names of the beneficiaries. This would allow the children to make the payments while also taking care of some other bills. There was no misconception that they wouid not be responsible for the loan.

tecate,

Thanks for the link. Good information.
There is a contract between the mortgage company and the debtor. Death does not end the contract. Think about it. What if debtor had perfect credit, and beneficiaries don't pay their bills. Do you think the lender would just "allow" a transfer to take place, when the people don't pay their bills? You gotta think a little further.

Also, the house could be worth $100k, and have a $20k mortgage. However, there are hospital bills, credit card bills, car loans, etc, that total $95k. The beneficiaries don't get the benefit of an almost paid off house, without the responsibility of the debts. Otherwise, people would just stop paying their bills as they get older, or near death, since there is no responsbility for them to be paid off.
 

seniorjudge

Senior Member
I appreciate the follow-up comments.


moburkes,

For some reason, there was a belief that the mortgage could be transferred or otherwise put into the names of the beneficiaries. This would allow the children to make the payments while also taking care of some other bills. There was no misconception that they wouid not be responsible for the loan.

tecate,

Thanks for the link. Good information.

You can do this if y'all pay off the old loan; there will then be a new loan refinanced.
 
Last edited:
This discussion is very helpful and I'm grateful for the feedback.

moburkes,

I understand what you mean. The credit worthiness of the beneficiaries is certainly a factor, and of course I understand that the debts of the deceased must be paid from their assets.

seniorjudge and lwpat,

Your points about refinancing and assuming the loan are what we're trying to figure out. The lender was contacted today and they were very interested in not having the loan paid off (I'm guessing that they don't want to lose the business).

However, they said that they couldn't process the assumption until probate was closed and the property was distributed to the heirs. But if the assets cannot be distributed until all debts have been cleared, then it seems like a bit of a catch-22.

The lender seemed to think we were wrong, and that probate could be closed WITHOUT the loan being paid off. This makes me wonder about the meaning of the following in the Probate Code quoted by tecate:

"11640. (a) When all debts have been paid or adequately provided
for
, or if the estate is insolvent, and the estate is in a condition
to be closed, the personal representative shall file a petition for,
and the court shall make, an order for final distribution of the
estate." [Emphasis mine]

If the lender agrees to allow the beneficiaries to assume the loan, does this mean that the debt has been "adequately provided for"? So that probate could be closed and final distribution of the estate could take place without the debt actually being paid off?

I have to believe that this situation is relatively common. It seems like it would be a fairly straightforward thing-- either you can do this or you can't- as I'm sure many people pass away with existing mortgages.

We have calls into the attorney but we've had many issues in this regard so any additional information would be helpful. Thanks again.
 

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