What Happens to My Debts When I Die?

We’ve all heard the saying, “You can’t take it with you when you die,” but most people assume it means our money or assets. In fact, this saying also applies to our debts as well.

Debt is an affliction of the living, and when you die it is the living who will be forced to deal with it. Fortunately, in most cases our debts cannot pass directly on to our loved ones, but they can severely impact the things you are able to pass on to your loved ones like money and property. The exception to actually inheriting the debt is when you are the joint owner of property or you jointly share other forms of debt. For example, if you had a cosigner on a loan that you fail to pay off before you die, the cosigner would become solely responsible for that debt, and if you jointly owned a home with your spouse and had not yet payed off the mortgage, that debt would fall on your spouse’s shoulders.

Dying with a high amount of debt or numerous unpaid debts can greatly complicate the administration of your estate. In general, none of your assets can be distributed until the outstanding debts are paid off.

Your estate will likely go through the probate process where the courts will decide in what order your debts need to be paid, and they will use the assets of your estate for that purpose. This not only includes cash assets, but can also include your property or other physical assets. This means your priceless family heirlooms will have a price put on them and then may be sold to pay your creditors. For the most part, all your debts will take priority over paying out inheritances to your heirs.

If your estate is insolvent (meaning the liabilities of the estate exceed the estate’s assets) and does not own enough to satisfy all debts, then generally your executor will have to liquidate everything they can, meaning nothing will be left to pass on to your loved ones. Luckily, there are some assets that usually are not included in the probate process, such as 401(k)s and insurance.  Also, homestead property is often exempt from creditor claims outside of claims directly associated with the property, e.g. mortgages or property taxes.  Furthermore, there are steps you can take to help protect certain assets from creditors through estate planning techniques. Even if you have debts, make sure you have something left over to leave your heirs. Call the Law Offices of John Mangan to learn more about how we can create an effective estate plan in order to protect your family’s future.