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Settling a Deceased Person’s Debts

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An estate is everything someone owns at the time of death. The process of paying bills and distributing what’s left is called probate. The executor of an estate uses assets to pay off debts.

This might include writing checks from a bank account or selling property to get the money. Indeed, the settlement of debts could eat up any or all of the assets heirs hoped to inherit. However, if there isn’t enough to cover debts, creditors generally have no recourse.

In some cases, family members could be on the hook for the decedent’s debt. Understanding how debts impact those left behind is an important part of estate planning. Folks who could become responsible for debts include:

  • Co-signers on a loan.
  • Joint owners or account holders.
  • Spouses in community property states. Community property from a marriage can be put toward debt obligations, but spouses aren’t responsible for debts that predate the marriage.

What types of debt can be inherited?

  • Mortgages and home equity loans — Anyone who inherits a home may be subject to the debt if it’s passed directly to them. They can sell the home to repay the debt or assume ownership and continue to make payments. When ownership of a mortgaged property is transferred, lenders can request proof that the new owner is able to repay the debt and can even demand immediate repayment. Typically, federal guidelines exempt family members from these rules, but the laws are complex. Speak with a lawyer regarding mortgage obligations.
  • Credit card debt — The outstanding balance on a credit card is a type of unsecured debt. If the estate can’t pay the balance, the credit card company is out of luck. Joint account holders must settle unpaid bills because they are equally responsible, but authorized users aren’t responsible for paying the balance.
  • Car loans — These are typically paid out of the estate. If payment isn’t received, the lender can repossess the car. Whoever inherits the vehicle can continue making payments.
  • Student loans — Federal student loans are forgiven if the student dies. PLUS loans are discharged if either the student or the parent who took out the loan passes away. Some private loan originators may forgive student loans at death.

What assets can’t creditors go after?

Creditors typically can’t go after certain assets — retirement accounts, living trusts, or life insurance benefits — to pay off debts. These assets go to the named beneficiaries, and they are not considered part of the probate process, settling the estate. Debt collectors can contact a deceased person’s spouse, parent, guardian, executor, or administrator to discuss the debt. But collectors can’t mislead family members into thinking they’re responsible for paying debts if they’re not.

This is just an introduction to a complicated process — there are additional provisions and exceptions. Family members and executors should keep in close touch with legal and financial professionals to make sure they pay what is owed in a timely manner, but nothing more.

If you want to explore your options to avoid probate, give our Sonoma County, CA office a call or email to discuss setting up a Living Trust and a comprehensive estate plan.

Miranda Dressler
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