What Happens to Debt When Someone Dies?

Imagine a scenario where a relative passes away with unpaid debts. What happens to the owed funds, and who is liable? This is a common and challenging question for loved ones and beneficiaries after someone’s death, and it can be especially magnified if an estate has substantial liabilities weighing it down.

In this article, we’ll outline how debts are paid when someone passes away, drawing on the insights and perspectives of two industry professionals. This includes how proper estate planning with the help of a professional can alleviate liability and protect assets from creditors. We’ll also highlight some common misconceptions surrounding outstanding debts for a deceased person.

Understanding the Fate of Debts in an Estate

People may have several debts to manage throughout their lives. Some are carefully planned, such as mortgages or student loans, while others are short-term and may come with high interest, like credit card balances or personal loans.

But what happens to unpaid debts when someone dies? Typically, their assets go into an estate, settled with probate or a detailed estate plan, including elements such as a will and trust. The deceased individual’s debts would be liabilities of the estate, meaning it would be responsible for paying any owed money to creditors.

Though the estate carries the burden, “this does not mean that the beneficiaries of the estate are liable for the debts, nor is the personal representative or executor,” says Phillip Reed, asset protection attorney at Reed Law PLC in Kalamazoo, MI. “What this means is that the debts of the deceased are paid from the assets of the estate and not paid from the personal assets of any heir or beneficiary.”

Before designated heirs or beneficiaries can receive their portion, the estate must clear debts using its resources, such as cash or proceeds from the sale of investments. According to Reed, “The order in which these are to be paid varies state to state, but there is typically a certain priority.” He points out that “funeral and administrative costs” usually take precedence and “payment of secured debts, unsecured debts and taxes and other government debts” often come next.

While the executor of an estate bears the duty of ensuring any debts get handled properly using the estate’s resources, they personally do not carry liability. “There may be a few exceptions to this rule,” such as “if the debt is a joint account or co-signed loan,” Reed specifies. However, he clarifies that “if the debt is in the deceased’s name alone, the heirs, beneficiaries, or personal representatives are not responsible to pay those outstanding debts from their personal assets.”

What If the Estate Can’t Pay?

Though an estate is liable to pay a person’s debts after death, there can be situations where it owes more than its assets can pay—even if they were all sold off.

So, what happens in this case? “If the estate lacks sufficient funds, most debts will go unpaid, with the exception of joint debts and co-signed loans,” explains Thomas J. Brock, CFA, CPA, an expert contributor at RetireGuide.com.

If an estate can’t pay its debts, the court may declare it insolvent during probate. Insolvency proves to creditors that the estate can’t pay everything it owes, leaving some obligations unsettled. As Brock suggests, an executor or heir won’t be liable unless they’re listed as a co-owner of an account (e.g., a credit card or business) or co-sign for a loan such as a mortgage. A living spouse could also need to pay the debts if they live in one of 10 community property states, including:

• Alaska (only if you opt-in with an agreement)
• Arizona
• California
• Idaho
• Louisiana
• Nevada
• New Mexico
• Texas
• Washington
• Wisconsin

Probate and Debts: What to Know

Probate provides a structured legal blueprint for settling estates, distributing assets, and tying loose ends such as unpaid debts. When a will exists and is accessible, it enables a court to assign a proper executor, who can begin identifying debts and ensuring they’re paid.

Here’s a further breakdown of the relationship between probate and debt:

Identifying Debts

An important aspect of probate is that it acts as an opportunity where both debts and assets can be identified for respective repayment and distribution. With the help of a will or estate planning documents, an executor can oversee and participate first-hand in this process.

Per Reed, “During probate, the executor or personal representative is responsible for identifying and disclosing all unpaid debts of the deceased.” He adds that this may “include credit cards, medical bills, loans, and mortgages.” While not personally responsible (except in a few circumstances), the executor will be the one to pay or clear the debts with creditors.

It Gives Creditors a Window to Collect

Probate can also be helpful because it gives creditors a limited period to collect on owed funds. This can add a layer of protection for the estate from firms coming back later about debt concerns.

“When a probate is opened, creditors are notified of the probate proceedings and are given a certain period of time to file a claim against the estate,” says Reed. “This is important, because if a creditor fails to file a claim in the required time frame they are barred from potential recovery from the estate.”

It’s Easier With a Will or Trust

Despite being a lengthy process many want to avoid altogether, probate is a lot easier with a defined estate plan, especially with debts on the table. As noted, this is mainly because elements such as a will or trust create a framework for both executors and the courts to follow, which can simplify the process. “Utilizing a will or a trust can influence how debts are managed and mitigated and may save the heirs money,” Reed emphasizes.

A benefit of a will, for instance, is that it provides specific instructions on how to disperse assets, both to beneficiaries and what to liquidate to make up for debts. According to Reed, the document “can specify which assets can be sold to cover debts, which may protect sentimental and important assets such as heirlooms and potentially family homes.”

Trusts are another helpful way to protect assets from creditors. For example, you could place cash or investments in an irrevocable trust. By doing so, you remove yourself of ownership from those assets and ensure they get to beneficiaries and heirs after your passing. Like the example above with a will, this gives you more control over which of your belongings go to people close to you and which must go toward paying debts, if any.

Without planned documents detailing wishes, things can get messy. In this case—called intestacy—the court will settle the estate as it sees fit. This would include using assets to pay debts and, if anything is left, scattering the rest to heirs.

“The existence of a will can greatly expedite the process,” Brock says. “The lack of a will usually entails unnecessary bureaucracy and cost,” he adds.

Misconceptions About Debt After Death

Because the question about the fate of debts after death can include complex legal nuances, there can be several misconceptions that surround it. Here are three of the most common, according to both Reed and Brock:

1. “The Debt Disappears”

Even though you or a relative are no longer around to pay the debts after passing away, the debts don’t vanish and must be settled. “Any debt must be paid off from the estate’s assets during probate before the remaining assets can be distributed to heirs,” says Reed. “If the estate has insufficient assets to cover debts, some creditors may not get paid, but the debt doesn’t ‘disappear’ until it is addressed through the legal process.”

2. “Family Is Responsible”

“Another common misconception” Brock points out “is that surviving family members are personally responsible for repaying debts when someone dies.” While it seems natural that your next-of-kin must handle unsettled debts, they don’t need to pay just because of their association with you. It’s only in certain cases (e.g., a co-signed agreement or jointly opened account, such as with a spouse) where close relatives would carry the burden.

3. “Creditors Can Pursue Family if the Estate Can’t Pay”

According to Reed, it’s also a myth “that if there isn’t enough money, the creditors can go after family.” The deceased’s estate is the entity that carries the debt—whether it can be resolved or not. This means that it’s the only target for unpaid creditors.

“Creditors can only pursue the estate, not family members,” Reed emphasizes.

It’s legal under the Fair Debt Collection Practices Act (FDCPA) for debt collectors to contact a small set of family members and legal representatives about someone’s obligations. However, they must follow strict rules, which are listed in full on the Federal Trade Commission’s (FTC’s) website. For instance, they can only call during certain hours of the day, but aren’t allowed to contact someone at work.

How Financial Advisors and Estate Planning Professionals Help

Dealing with the aftermath of someone’s death or planning to protect your assets after your passing can be complex and overwhelming. For this reason, it can be helpful to seek the expertise of an estate planning professional, such as an attorney or financial advisor experienced with the subject.

For instance, with the help of an estate planner or financial professional, you can ensure you have documents and tools in place, such as a will and trust. With these, an advisor could help you take steps to protect your assets and control where they go, even in the face of debts.

“Financial advisors and estate planners help clients protect their estates from creditors in a variety of ways. Popular strategies include naming beneficiaries, gifting assets, utilizing trusts and implementing life insurance vehicles,” says Brock.