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What Happens When a Person Dies with an Unpaid Debt?
All debts of a deceased person must generally be paid off before any assets can be distributed to the beneficiaries. Typically a will controls financial affairs after a person's death by distributing assets and directing for the payment of debts. The person who oversees this process is the executor, who is named in the will or appointed by the court. If there are unpaid debts, the executor sells off the assets of the deceased person and uses the proceeds to pay off as many debts as possible. Payments are made as follows:
- First paid are the secured debts such as mortgage or car payments.
- Next are unsecured debts such as credit card bills.
- Any debts that are left after the money runs out would not be repaid and the creditor takes the loss.
- If there are remaining assets, they are paid to the people inheriting under the will or through intestacy.
Can a Person Avoid Paying Their Debts by Giving Away Their Assets before Death?
In some circumstances, people attempt to give away their assets before dying in an attempt to avoid leaving the money to pay off debts. This may not be successful, because Creditors have the right to seize the assets and reverse the gifts after death if the transfers were done solely to avoid legitimate creditors.
Can Spouses Inherit Their Partner’s Debts?
Generally not, but there are two exceptions.
- First, the answer might depend on whether the state was a community property state. Community property states consider all property obtained during the marriage joint property and the property belongs to both spouses. However, the downside to community property is that spouses will also be liable for their partner’s debts.
- Second, spouses who co-sign a loan, regardless of whether their state uses community property or not, will be liable for the debt they co-signed.
Can Children Inherit Their Parents' Debts?
Children that are not a party to a debt prior to their parent's death cannot inherit a debt. An exception are debts from a joint account of both the parent and child, in which case the child is responsible for the unpaid debt.
What Happens If I Inherit an Estate with Debt?
Most people view inheritance as a gain for the beneficiary. However, the estate may in fact owe more money than it has or the property you inherited looks like it might come with an expensive lawsuit or be foreclosed for some reason or another.
Inheritances are essentially gifts, so beneficiaries have the right to disclaim, or decline, inheritance. This might be a prudent idea if the inheritance will cost more money than its work. If you do accept an inheritance, the property belongs wholly to the beneficiary it was given to, including the debt.
Why Do Creditors Call Family about the Deceased’s Debt?
Creditors can be aggressive after the borrower passes away since they only have a few opportunities left to collect the debt before they have to write it off as a loss. Some creditors will call the deceased’s family, even if they know there is no way they can legally collect the money.
If you receive creditor notices or calls after a loved one passes away and you are not the named executor, double check to see if there was someway you could have co-owned the debt. If you are not a co-owner to the debt, instruct the creditor to contact the executor of the estate. If the creditor persists, contact an attorney.
Should I Contact an Attorney?
An estate planning attorney can provide valuable assistance when dealing with possible financial responsibilities you or your children may possibly encounter when planning out your estate. An experienced attorney can advise you of your legal rights as well as possible remedies you may have.
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Last Modified: 10-20-2014 11:03 AM PDT
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