Consumer Law

What Happens to Debt After Death?

Debts don't usually die with the individual who incurred them. Find out which debts your heirs will need to pay off before enjoying your bequest.

In most cases, friends and family don’t have to pay off your bills personally after your death. But that doesn’t mean that your creditors won’t receive payment. In fact, if money is available, creditors stand at the front of the line and get paid first. An heir—such as a spouse, child, or friend entitled to inherit from you—will receive whatever is left after your assets are used to satisfy your obligations, if anything. In this article, you’ll learn about the payment of debt after death.

Are Your Friends and Family Responsible for Your Debt?

Even though your heirs aren’t responsible for paying your bills with personal funds after you die, exceptions to this general rule exist. For example:

  • a cosigner must pay any debt that person was obligated to pay beforehand, and
  • your spouse must pay for any debt incurred during marriage while you lived in a community property state.

The laws of your state might create additional responsibilities, too. For instance, in some states, a spouse remains legally responsible for your medical or nursing home bills (sometimes referred to as the “doctrine of necessities”).

What Is a Probate Estate?

If you own property when you die, your spouse or other authorized person might open up a legal proceeding with the local probate court—the government entity that oversees the collection and distribution of any property that you own at the time of your death. All of your assets make up what’s known as the “probate estate.”

What Are the Differences Between Probate and Non-Probate Assets?

Property that passes into your probate estate at the time of your death is a probate asset. Typically, this includes things that you put in a will, but might include property that you didn’t make arrangements for, such as miscellaneous personal property (anything that you own other than real estate).

A non-probate asset automatically passes to your designated beneficiary (the person you indicate should receive the property) and isn’t subject to creditor claims. Examples of non-probate assets include:

  • life insurance policies
  • retirement accounts with a named beneficiary
  • joint and survivorship bank accounts, and
  • real estate that automatically transfers to another person upon death (for instance, if you own the property with another person as joint tenants).

However, keep in mind that non-probate assets will still be subject to the claims of secured creditors who have liens (the right to take the property if you don’t pay the loan) on that particular property. For instance, you’ll have to pay off an outstanding mortgage before you can keep a house, or an automobile loan if you want to keep a car (more below).

(You can learn more by reading Secured Claims and Liens in Bankruptcy.)

Funeral and Burial Expenses

Typically, your estate is responsible for paying your funeral expenses. However, it’s common for a spouse or other loved one to pay for this cost before opening your probate estate because some probate courts require proof of funeral and burial bill payment before starting probate.

Secured and Unsecured Debt

Even though your heirs might not be personally liable to your creditors, the reality is that they’ll likely have to pay debts with your remaining assets before benefiting from your bequest. Creditor payment rights differ depending on whether the debt is secured or unsecured.

(You’ll find a discussion about the differences between secured and unsecured debt in the article Understanding the Payment Priority of Debt in Bankruptcy.)

Secured Debt

A lender doesn’t want to lose money, so it’s common for the lender to require “collateral,” such as a house or vehicle, to guarantee payment of the loan. If you voluntarily enter into the deal, you’ll give the bank a “lien” on the home or car that will “secure” the debt. If you don’t make your payment, the lien will allow the lender to foreclose on or repossess the property. But that’s not the only way a secured debt can come into being. In some cases, your creditor can place a lien on your property without your permission, such as when you owe taxes. Examples of secured debt include a:

  • mortgage
  • home equity line of credit
  • tax lien
  • judgment lien, or
  • car loan.

Your heirs will have to pay off all secured claims before keeping the property pledged as payment for the debt. If your spouse or another heir wishes to continue to live in your home or retain the property, they will have to arrange with the creditor to pay that debt. If your spouse or heir does not repay the secured debt, then the creditor can foreclose on the real property, repossess the vehicle, or take action to take back any other collateral for the debt.

Unsecured Debt

Unlike secured debts, you don’t have to give the property you purchased back if you don’t make the payment. Examples of unsecured debt include:

  • credit cards
  • leases (such as an automobile or apartment lease)
  • utility bills, and
  • personal loans or other installment loans that are not collateralized.

Creditors of unsecured debt can collect against your estate from available probate assets, and a priority ranking system outlined in the law determines the payment of the creditor claims. For example, the estate will likely pay an outstanding spousal support obligation before a credit card bill. If there isn’t enough money to fully pay all debts, creditors with the same priority receive an equal payment percentage (a pro rata share). Creditors too low in the ranking system to receive anything must live with it and will have no further recourse for the unpaid balance.

Exceptions: Debts Discharged Upon Death

If your unsecured debt is canceled or discharged upon your death—which can happen in limited circumstances—the creditor might not be able to make a claim against your estate. The most common example is federal student loans. Private student loans, however, remain payable at death so that the creditor can make a claim against your probate estate.

Check Your State Law

Probate and debt laws vary from state to state. If you have significant probate assets that you’d like to protect, you might want to get a life insurance policy to cover outstanding debt. For more specific help, you should speak with an attorney.

Questions for Your Attorney

  • Do I need a will?
  • Will probate be necessary after I die?
  • What can I do to ensure that my children receive as much of my property as possible?

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