PEACE OF MIND
Americans are, quite literally, getting buried in debt. According to Debt.org, 73 percent of Americans die owing money.
As a general rule, a person’s debts do not go away when they die. State laws also play a factor in the post-death debt settlement process.
If you are an estate’s executor/ personal representative and have been contacted by a debt collector about a deceased family member’s debt, you should understand your rights and obligations.
One nation, under debt
Debt is as old as civilization itself. According to credit reporting agency Experian, the largest and most common debts include mortgages, auto loans, student loans, credit cards and personal loans.
What happens to your debt when you die Do you know what happens to your debt when you die? The answer depends on factors that include the type of debt and the state where you live.
In most cases — and in Texas — your loved ones are not stuck with your unpaid bills because creditors are paid only from the assets (e.g., a home, car, bank accounts, investment accounts) that are (a) part of your probate estate and go through a probate court or (b) in your revocable living trust.
If you do not leave behind enough assets in your probate estate and living trust to fully cover the debts owed, creditors may have to settle for what is available.
There are some exceptions to the idea that surviving family members and other heirs are not on the hook for the debt, including: a person who cosigns on a loan; the spouse of a deceased person who lives in a state with community property laws (like Texas); and the spouse of a deceased person who lives in a state that requires a surviving spouse to pay certain healthcare expenses and other kinds of debt.
The rules governing when a surviving spouse is responsible for paying unpaid medical bills are complex and vary by state.
However, unless the survivor also agrees to the medical debt or is responsible under state law, they are generally not liable for the debt.
Not all debts go away at death
Debts not inherited by a specific individual under the exceptions described above do not just disappear, except for debts that are dischargeable by death. For example, federal student loans, are usually discharged when the borrower dies, as long as the loan servicer receives proof of death.
Secured versus unsecured debt
Determining how and when to pay a debt after the debtor has passed away and who or what may owe the debt can depend on whether the debt is secured or unsecured.
— Secured debt is backed by collateral (a tangible asset the lender can repossess or sell if the borrower does not pay back the debt). Common examples of secured debt are mortgages (secured by real property) and car loans (secured by the vehicle). Secured debts typically pass with the asset.
If estate assets are insufficient to cover the secured debt or the beneficiary does not assume the debt, the lender can seize the collateral to recoup their losses.
— Unsecured debt is not backed by collateral (there is no specific asset backing the debt). Unsecured debt includes credit card debt and personal loans.
Unsecured creditors have a lower priority than secured creditors in probate. If the probate estate has enough funds, unsecured debts are paid off before any inheritance is distributed.
However, if the estate lacks sufficient funds to satisfy all its debts, unsecured creditors are typically last in line for repayment and may not receive the full amount they are owed. Funeral expenses also take priority over some creditor claims.
Any state and federal taxes that the decedent owes, as well as probate estate administration expenses incurred during probate (e.g., legal and accounting fees), may also supersede creditors.
Knowing which debts have priority over others in probate is the responsibility of the estate’s executor/personal representative. Make sure you know what is owed.
This article provided as a service of the Law Office of Lasa A. Arnold PLLC
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