How Debt Is Handled After Death

When a person passes away, their debts do not simply disappear. Instead, these debts are managed through a legal process involving the deceased’s estate. The estate includes all assets owned by the deceased, such as savings, property, and investments. This process, known as probate, ensures that debts are paid and assets are distributed according to the will or state laws if no will exists.

Who Is Responsible for Your Debt When You Die?

Debts are categorized as either secured or unsecured. Secured debts, like mortgages and auto loans, are backed by collateral, meaning the lender can claim the collateral if the debt is unpaid. Unsecured debts, such as credit card bills and personal loans, are not backed by collateral and are paid from the estate’s assets.

If the estate lacks sufficient funds to cover all debts, state laws determine the order in which creditors are paid. Generally, secured debts take precedence over unsecured debts.

Which Debt Can Be Inherited?

Some debts can be inherited, while others cannot. Inherited debts may include:

• Joint debts: If a loan was taken out jointly, the surviving borrower is responsible for repayment.
• Cosigned debt: A cosigner agrees to pay the debt if the primary borrower cannot. This responsibility extends after death.
• Home equity loans: Inherited property with an outstanding home equity loan carries the debt to the inheritor.
• Community property states: In states like California and Texas, spouses may be responsible for certain debts even if they were not the primary borrower.
• Timeshares: Heirs listed on the timeshare deed inherit the property and its associated fees.
• Medical debt: Some states hold spouses or children responsible for specific medical debts.

Which Assets Are Protected From Creditors?

Certain assets are protected from creditors, including:

• Retirement accounts like 401(k)s, IRAs, and health savings accounts.
• Life insurance payments, which go directly to beneficiaries.
• Living trusts, which allow property to pass to heirs without going through probate.
• Brokerage accounts held with investment firms.

How to Notify Creditors of Death

It is crucial for the executor of the will or the deceased’s loved ones to notify creditors of the death promptly. This involves sending a copy of the death certificate to each creditor. Creditors will then pause collection efforts and notify the three major credit bureaus (Experian, TransUnion, and Equifax) to mark the accounts as associated with a deceased person.

Obtaining a copy of the deceased’s credit report can help identify all creditors, making the notification process more efficient.

The Bottom Line

Understanding how debts are handled after death can alleviate stress for surviving family members. Most debts are paid from the estate, and some may remain unpaid if funds are insufficient. It is advisable to consult an attorney to clarify which debts need to be paid and to ensure proper handling of the estate.

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