5 Key Things To Know About Death And Your Debts

Posted on: 13 May 2022

When you pass away, what happens to any debts you have open at the time? Do you know? If you're like many Americans, you may know little about what happens to your estate. And one of the most confusing subjects is how your debts are handled. To help you make the best financial and estate planning choices, here are a few key things to know about debts and death. 

1. Your Estate Pays Debts

As a general rule of thumb, your estate will be responsible for paying legitimate and legal debts you owed at the time of passing. The executor or administrator will conduct a search for valid debts for which you have records. But debtors are also given a period of time in which to submit a claim against the estate. This includes personal loans among friends or family. 

2. Joint Borrowers Are On the Hook

Did you borrow money jointly with a partner or family member? Was anyone a co-signer for you? If so, the remaining debt generally becomes their responsibility in entirety. State probate rules may vary as to the specific details of shared debt, but joint borrowers may need to take their own steps if the debt was large. 

3. Authorized Signers and Family Aren't

One question many have about debt at death is whether or not others must pay your debts. The good news? If your name was the only one on the debt, it is not the responsibility of your family, friends, children, parents, or authorized signers. Spouses may or may not be affected depending on property rules in your state. However, debt collectors will often try to convince heirs to pay, so accurate knowledge is vital. 

4. The Executor Will Try to Be Fair

What happens if your estate isn't large enough to pay all your debts? In this case, the goal of the executor will be to come up with a fair payment amount for all debts. Secured debts are likely to be returned to the lender if the estate or heirs can't pay the loans. Unsecured debts, including credit cards and personal loans, are usually divided equally or equitably from what's left.

5. Some Assets Can Be Protected

Liquidation of assets doesn't necessarily mean all your worldly goods must be sold to pay off debts. Generally, specific bequests can be distributed to those who have been named. In addition, some assets — such as life insurance policies and retirement accounts — may be outside the purview of debt payment. And anything in a trust is usually also outside the estate. 

Where to Learn More

What specific questions do you have about your debts after death? Are you an heir of an estate with debts?

Reach out to a local estate administration attorney to learn more about your rights and responsibilities.