Inheriting Debt

Today, most people die with some amount of debt, either large or small. The heirs and loved ones of the deceased may not know what to do about the debt. They may not know how to approach distributing their estate when they find outstanding debts.

What debts have to be paid? How does the process work? Here is a short guide to dealing with debts and creditors after a loved one passes on.

What Happens if Someone Dies with Unpaid Debt?

The general rule across all jurisdictions is that outstanding debts must be paid by the deceased’s estate before any other property or assets can be distributed to their heirs. Who takes care of this? If the person has died with a valid will in place, they have already named someone to oversee their estate, known as an executor. This person is given the legal responsibility to carry out the deceased’s wishes in terms of who receives what property and for taking care of any possible debts that the person may have left behind.

If someone has died without a valid will, their estate will go through the legal process of intestacy. During intestacy, state law dictates who is entitled to inherit from the deceased and what portions. Depending on the jurisdiction, a probate court judge will appoint someone to perform the executor’s duties, called an estate administrator or personal representative. It is then that person’s responsibility to pay the deceased’s debts and distribute the estate as ordered by state law and the judge.

What Does the Executor Do?

Most people worry that they will have to take money out of their own pockets to pay for a family member’s debt after they pass, but this is generally not the case. The executor or administrator is charged with paying off as much of the debt as possible with assets from the deceased person’s estate. This may require selling off some assets of the estate.

If the debt is paid off with property or other assets remaining, the executor can then distribute the rest to the person’s heirs. If only part of the debt can be paid off, the executor and the heirs are under no obligations to use their own money to cover the rest.

Who Gets Paid First if There are Multiple Debts?

When an estate is worth more than it owes, it is called a solvent estate. When the amount of debt is greater than the estate has, it is deemed insolvent. Because there are cases where a person’s debts will be worth more than their estate, there is a hierarchy as to who will get paid first.

At the top of the list are secured debts like mortgages and certain medical bills. Other obligations like student loans, credit card debt, and other unsecured debts are lesser priorities. If there is no money to pay these, the creditor is generally out of luck. None of the deceased’s heirs can be forced to cover the rest of their obligations unless they are already legally tied to the debt through being a co-signer or some other way.

What Kinds of Debt Can Be Inherited?

Although individual debts typically aren’t the responsibility of survivors, some debts may be inherited when someone dies. If your loved one passes away and their estate doesn’t cover all of their outstanding debts, you could be responsible in the following situations:

• Joint and cosigned debt: If you were on a joint account such as a joint credit card with another person, and that person dies, you will be responsible for paying the debt as the remaining account holder. Authorized users are typically not responsible for credit card debt, according to the Consumer Financial Protection Bureau (CFPB).
• Debt in community property states: In some states with community property laws, a surviving spouse may be required to pay some of their deceased spouse’s debts with community assets. Community property states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin; Alaska allows spouses to make their property community.
• Home equity loans on inherited homes: If you inherited a home from a deceased person with a home equity loan on the property, you also inherit that debt.

What Happens if You Inherit an Estate with Debts?

Although most people assume that inheriting via a will or other means will benefit them, the reality might be that the estate owes more than it can pay. In addition, if there are liens attached to a property, a lawsuit against the estate, or an estate asset, the person set to inherit might not be willing to take on the legal or financial burdens that come with the inheritance.

Because estate distributions are legally classified as a gift, a beneficiary or heir has every right to formally decline the inheritance, lawfully known as the right to disclaim.

Can Creditors Call Family Members to Collect Debts?

When the executor submits the deceased’s will for probate, the court officially names them as the estate representative, which includes debts. If creditors wish to collect a debt, they should contact the executor or their attorney and not the deceased’s family members.

As long as the family member does not already own a part of the debt through co-signing or another method, creditors should not be contacting the deceased’s family members for money. If you or another family member keeps getting harassed by lenders or collection agencies, you should contact an attorney as soon as possible.

What Assets Are Protected From Creditors?

Some assets are generally protected from creditors’ claims after a person dies. Even if a spouse or family member has outstanding debt, these assets are considered “non-probate assets” since they have a designated beneficiary or a joint tenancy with rights of survivorship. These assets bypass the complicated probate court process and allow survivors to receive the asset directly, regardless of whether there’s a will or not. The following assets may be protected from creditors:

• Retirement accounts: If your loved one has a 401(k), IRA, or another type of retirement account with you listed as a beneficiary, the retirement account should go directly to you and be protected from creditors.
• Life insurance: If you’re the named beneficiary for a loved one’s life insurance, the life insurance proceeds will pass directly to you and can’t be taken by creditors.
• Living trust: Trusts are legal arrangements that hold assets for beneficiaries. Trusts can bypass the probate process. Some trusts help protect the estate from creditor claims and reduce taxes.

Do I Need an Attorney to Handle Estate Debt Issues?

Dealing with the estate of a loved one can be difficult, both emotionally and logistically. An attorney will guide you through the probate process and help you deal with creditors.

In addition, an inheritance attorney can also help on the front end, helping you formulate an estate plan to reduce the burden and stress on your loved ones down the road.

Use LegalMatch to find the right estate planning or probate attorney in your area today. LegalMatch charges no fee to schedule a consultation with one of the many experienced attorneys near you.