Dying with debt

Dying with Debt. What happens depends on where you live.

At some point in our lives we may ask ourselves: “If I die and have debt, who or what will be responsible for paying back those I owe?”

The laws regarding debt after death are defined by each state so there isn’t a single answer to the question above for everyone. Typically, the only time a family member would be responsible for parents’ debt is if they cosigned a loan. People generally do not inherit another person’s debt. The exception to this general rule is for those states that impose filial responsibility on the children of aging seniors. See discussion below. Of course, debt that is secured with collateral such as assets or property, will be partially or wholly satisfied when the creditor comes after those assets or property if the debt is not properly repaid. Children are not responsible if secured debt is not totally covered by repossession. On the other hand, children can keep the collateralized assets if they are willing to assume the debt.

When we die, a new entity emerges, called the estate. An estate represents the deceased’s assets and liabilities. Upon death, a legal process called probate will resolve the debts and distribute remaining assets to the heirs. On the other hand, estates have to be of a certain size in most states or probate is not required. Without probate, creditors who have no secured interest in their contracts may have to take a loss as they cannot come after the children for repayment and they have no other legal means to demand repayment.

Under probate, creditors may legally seize assets within the estate such as money or property in order to cure a debt owed to them. Depending on the state, a creditor has a fixed amount of time to make a claim against an estate for payment.

There is a legal pecking order as to who is allowed first claim to retrieve money from the estate. The higher priority goes to funeral expenses, administrative expenses, and federal taxes. The estate may then pay off expenses from the last illness and state taxes. At the bottom of the barrel are unsecured creditors, like credit card companies.

Generally, all debts must first be paid by the estate before any remaining assets are distributed to the heirs. An outstanding credit card balance, for example, must be paid before any money or gifts can be distributed to an heir. If there are not enough assets to pay the debts, then all assets and property will be sold to pay down as much of the debt as possible and the heirs will inherit nothing.

In the case of secured debts such as home mortgage or auto loans this property may be distributed to heir including its debt. For example, if a car is worth $15,000 and the loan on the car is $7,500 the person inheriting the car assumes the debt. At death, in most states, it is a simple matter to transfer the title to someone else and it will become that person’s obligation to pay off the loan.

Except for certain situations which include joint property or joint debt, creditors typically won’t go after surviving family members when a debt cannot be paid out of the estate under probate. The majority of married couples have joint accounts and joint debt. In these situations, a surviving spouse will be held legally responsible for the debt of his or her deceased spouse even if they did not generate the debt themselves. This is something that will often cause problems for surviving spouses who usually end up with a reduced income at the death of the partner and now cannot pay off existing debt and meet their everyday needs.

In community property states where married couples are considered to own their property, assets, and income jointly, credit accounts opened during marriage are automatically considered to be joint accounts. This could affect what the surviving spouse will have to pay, depending on the debt incurred by incurred by the deceased. The following states are community property states:

Arizona
California
Idaho
Louisiana
Nevada
New Mexico
Texas
Washington
Wisconsin
To conclude, when someone passes away, the estate is responsible for paying off any balances owed by the deceased, not the family. If the estate goes through probate, the administrator or executor will look at the debts and assets and, guided by the laws of that state, determine in what order the bills should be paid. The remaining assets will be distributed to the heirs according to a will or state distribution laws if no will exists.

by the National Care Planning Council