What Happens to Your Debt When You Pass

The majority of us will do our best to pay off all our debt prior to our death. Of course, what all of us truly want is to make enough money to have a large savings account when we die; however, for many of us, this will not be the case. Debt is a fairly widespread problem in the US. The average US household is approximately $130,000 in debt, and one in five people in the US believe that they will die long before they are able to pay off their massive debts. These people are left with the question of what will happen to their debt if they do happen to die prior to paying it all off? Will your family be held responsible for all those unpaid bills? Unfortunately, the answer to this question is not that cut and dry.

Probate

The process of probate is how our country ensures that the families of a recently deceased loved one are not stuck paying off all of the debts of the deceased. Unfortunately, many of us will find out that probate can be a long and stressful process and this process will not release any property or assets the deceased left behind for their loved ones until the entire process is finished. 

When a loved one dies, their will and assets will become the responsibility of an executor. The executor’s main purpose is to put everything in order. They will be tasked with detailing everything included in the estate of the deceased and paying off as many debts as possible. Then the executor will be able to distribute whatever assets are left to the beneficiaries listed in their will. This process will take some time. Some beneficiaries may not know what they will inherit if anything until months down the road. Remember all of their debts may be paid off, but items in the estate could be taken into account and levied for the payment of their bills. This means any heirlooms, savings accounts, or other memorable objects could possibly be used to pay off their debts, and you may not inherit that things that you believed you would.

Debts covered in Probate

There is an order to debts covered in probate. The top layer of debts includes items such as funeral costs, taxes, and secured debts, like mortgages. These debts take top priority and are typically paid off first with any money from the estate. If there is not enough money to cover these costs, the executor will sell off other assets in the estate to make up the difference. Usually, if a beneficiary inherits an item that is not completely paid off, such as a car or house, the bank will allow them to keep these items as long as they are able to keep up the payments. Next on the probate totem pole is unsecured debts, which includes items like credit cards and student loans. If there is enough money left in the estate, then the executor is obligated to pay these off. However, if there is no money left, then these lenders will be out of luck.

Probate debt exceptions

Remember there are always exceptions to every rule. Here are some exceptions to probate debt:

• Joint debts are not covered in probate. According to the law, the debt will now become the sole responsibility of the surviving co-owner. If you owned a house with your spouse, your house will not become part of the estate because one of the owners is still living. You will not inherit any debt that is solely in the name of the deceased, but you will become the sole responsible party for any debts the two of you co-signed on.
  
  

• Retirement accounts. If the deceased left an individual retirement plan or a 401k account to someone, then the beneficiary will automatically receive these items. These are not required to go towards the estate. There is still a small chance the government could go after these accounts to pay off any unpaid taxes the deceased may owe, but normally, these will go directly to the beneficiary named.
  
  

• Life insurance. Life insurance follows the same treatment as retirement accounts. These policies will go directly to the beneficiary named and will not become a part of the estate.
  
  

Probate debt exception to the exception

The exception to the exception clause only falls into effect when you live in one of the ten states that recognize community property. Community property is basically any debt that was undertaken to benefit or aid the family, such as the deceased buying a house for the entire family to live in. If the state finds the family benefitted from this debt, then the family will be held responsible for paying off the mortgage. The rules will be a little different if you happen to live in these ten states:

• Alaska
  
  

• Arizona
  
  

• California
  
  

• Idaho
  
  

• Louisiana
  
  

• Nevada
  
  

• New Mexico
  
  

• Texas
  
  

• Washington
  
  

• Wisconsin
  
  

Unfortunately, a lot of us will find ourselves endlessly trying to pay off our mountain of debt. Remember even if it seems impossible to die debt-free, our loved ones may not have to live in fear of trying to pay off our debts. If your estate is not enough to pay off your bills, then your loved ones cannot be forced to pay them. Your loved ones may be forced to lose out on their inheritance, but at least your creditors legally have no right to force them to pay off your unpaid debts. Of course, many of them may not give up too easily. You may find that some will try calling over and over to receive some type of payment. However, you are not legally required to pay them anything. If you do happen to encounter any creditor that you feel is being overly aggressive or pushy in repaying them, you can lodge a complaint with the Consumer Financial Protection Bureau. Remember, it will be easier for your family if you are able to pay off your debts before passing, but if you cannot, you can rest a little easier knowing your family will not be required to pay off your debt once you pass.