Debt is something that tends to weigh on people’s minds – even when they are contemplating their own mortality. Between mortgages, car loans, credit cards and other obligations, the average American household is carrying about $154,152 in debt.
Many people worry that leaving unpaid debts behind will burden their loved ones after they die. Family members, too, often fear that they will inherit those bills. So, what really happens?
Debts are typically paid by the deceased’s estate
Here’s the good news: When someone dies, their estate becomes responsible for their bills. The executor or personal representative gathers up the deceased person’s assets, notifies their creditors and then pays any approved claims before any of the beneficiaries get their inheritances.
In some cases, debts may be paid off via insurance policies. It isn’t uncommon for mortgages and car notes to have insurance riders that will pay off the remaining balance on the loan when the principal dies. If they are not, the house and car may be sold to pay off the loans, and the remaining proceeds go into the estate.
What if there’s not enough money to pay all the bills?
Some estates are insolvent, meaning they don’t have enough in the “pot” to cover all the debts. In that case, state law dictates which creditors get paid and in what order. In general, the creditor simply has to write off any unpaid debts.
In situations where the house and car are “upside down” (meaning the equity they have isn’t enough to cover the loans) and the estate cannot cover the debt, they may be foreclosed upon or repossessed by the lender, then sold to recoup as much of their losses as possible. Nothing will go to the estate, but no debt will follow it, either.
Family members only end up with the debt in limited situations, such as when they cosigned a loan or are joint account holders on credit cards (not merely authorized users).
If you’re worried about protecting your assets and passing something to your loved ones after you are gone, a skilled attorney can help.