Is Debt Inherited?
At some point in your life you may ask if I die and have debt, who is responsible for paying what you owe?
Well, laws regarding debt after you die is different for each state, so there is not a single answer to the question for everyone. In most cases, the only time a family member would be responsible for your debt is if they cosigned a loan with you. Generally speaking, no one inherits another person’s debt.
When we die, a new entity emerges called our Estate. An “Estate” represents your assets and your liabilities. Upon death, a legal process called “Probate” will resolve your debts and distribute your remaining assets to your heir(s).
Creditors may legally seize assets within your estate (money or property) in order to cure a debt owed to them. If you have no assets, your creditors may have to take a loss on your debts. Depending on the state you live in, a creditor has a fixed amount of time to make a claim against your estate for payment.
There is a legal pecking order as to who is allowed first claim to retrieve money from your estate. The highest priority goes to funeral expenses, administrative expenses and federal taxes. The estate may then pay off expenses from the last illness and state taxes. At the bottom of the list are unsecured creditors such as credit card companies.
Generally, all debts must first be paid by the estate before any remaining assets are distributed to an heir. This includes credit card balances which must be paid off before any money or gifts can be distributed to an heir. If there are not enough assets to pay the debits, then all assets and property will be sold to pay down as much of the debt as possible and the heir will inherit nothing.
In the case of secured debits such as home mortgages and auto loans, property may be distributed along with its debt. You may distribute secured debts but it will become that person’s obligation to pay off the loan.
Except for certain situations such as joint property or joint debt, creditors will not go after surviving family members when a debt cannot be paid by your estate money. The majority of married couples have joint accounts and joint debt. In this case, a surviving spouse will be held legally responsible for the debt of their deceased spouse even if they did not generate the debt themselves. This is something that will often cause problems for surviving spouses who financially cannot pay off old debt and meet their everyday living needs.
To conclude, when you pass away, your estate is responsible for paying off any balances owed by you, not your family. If your estate goes through probate, your administrator or executor will look at your debts and assets and guided by the laws of your state, determine in what order your bills should be paid. The remaining assets will be distributed to your heirs according to your will or state law.