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What happens to your debts and unpaid bills when you die?

by Curtis Lee | Contributor
December 07, 2022

When it comes to estate planning, a lot of the preparation deals with leaving as much as possible for your surviving loved ones and heirs. Whether it's ensuring that your property gets passed down as smoothly as possible or the taxman takes as little as possible, there's the idea that you'll be leaving something of value when you pass on.

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In addition to leaving money, family heirlooms and other items of value, you can also have unpaid bills and debts that could pass on to your surviving family members. But how do these get handled? The short answer is that “it depends.” It depends on several variables, such as:

  • The type of debt or unpaid bill
  • The applicable law
  • The amount and type of assets left behind after someone dies

Let's take a look at some commonly asked questions to help explain how unpaid bills and outstanding debts get handled after someone passes away.

What happens to your debt when you die?

If you have a debt when you die, there are four ways it can be handled. First, the debt could be forgiven. This isn't very common, and the most notable example of this is federal student loans. However, private student loans are not usually forgiven when the person owing the debt passes away.

Second, the debt gets paid using the assets you leave behind. Third, the debt never gets paid (or only gets partially paid) because there aren't enough assets left behind. Fourth, someone still living becomes legally responsible for paying back the debt.

What about debts with monthly payments like a car loan, credit card or mortgage?

If the deceased dies with a debt that has an outstanding balance with regular payments, how it gets handled depends on applicable state law, the specific terms of the loan or debt contract and if there are any other co-signers or joint account holders for the debt.

In situations where the deceased was the only person responsible for the debt, the deceased's estate is responsible for using whatever assets are available to either continue making monthly payments on the debt or pay off the entire remaining balance with the deceased's assets.

If the property used to secure the debt gets inherited, then the person taking the property (like a car or house) may have to continue making the regular payments. Depending on the terms of the loan, it's also possible the creditor may have the option to repossess the property. But this isn't likely if the person taking the property continues to make the regular payments.

Then there are situations where the obligation to pay the deceased's debt still exists with someone else who's still alive. This might occur if there's an account with a joint owner (like with a credit card), a co-signer or the debt is subject to community property rules. Under these circumstances, the surviving spouse, account owner or co-signer is then responsible for continuing to make the monthly payments or paying off the remaining debt (if allowed or required by the debt's contractual terms).

If the individual now responsible for paying the deceased's debt fails to do so in a timely manner, it could lead to the accrual of penalties, interest and/or repossession of the property.

Who's responsible for paying a deceased person's debts or unpaid bills?

Before answering this question, we need to clarify what it means to “pay,” as it can refer to two concepts. The first concept is the physical act of paying a debt or bill. When someone dies, they obviously can't write a check, use a credit card or authorize a bank transfer. So a surviving individual must take care of this, and it's typically the administrator, trustee, executor or another personal representative of the deceased's estate. This individual will pay a bill or debt, but won't be using their own money to do so.

The second concept relates to whose money will be used to pay the debt or bill. Put another way, it's deciding if the deceased's debt gets paid using money from the deceased's estate or from the bank account or assets from someone who's still alive. It's this second meaning of “pay” that this article will focus on and most people will have questions about.

All that being said, only those legally or contractually obligated to repay a debt will be responsible for paying the deceased's unpaid bills and debts when they die. In other words, if a bill or debt is only in the deceased's name, no one else is usually legally obligated to use their own money to pay the unpaid bill or debt. But even if the debt was only in the deceased's name, a surviving spouse or another individual could still be personally responsible for paying back the debt. This could occur if the individual:

  • Was a co-signer on the debt;
  • Was the deceased's spouse and the couple lived in a community property state; and/or
  • Lived in a state that has a “necessaries statute,” which requires surviving spouses to pay back certain personal debts of a spouse who has just died, such as unpaid medical bills.

How do outstanding debts get paid when you die?

In most cases, they'll be taken care of by the administrator or executor of the deceased's estate with the money coming from the assets left behind by the deceased. Your executor won't have to use their personal funds to pay your unpaid bills or debts, but they'll have to make arrangements to get your debts and bills paid. Unless the property is otherwise exempt, creditors are first in line to have their debts paid back before the heirs can receive anything from the estate. Let's look at the following example to help show how things could work.

Let's say you pass away with the following debts in your estate:

  • $100,000 mortgage on your home
  • $5,000 in credit card bills
  • $10,000 car loan balance

Your notable assets from your estate at the time of your death include:

  • $1,000 in your bank account
  • Your home that's worth $300,000
  • Your car that's worth $9,000

Let's also assume that you want to pass down your house to your son, Bob, and your car to your daughter, Jane.

If Bob wants to accept the home as his inheritance and keep it, he must continue making monthly payments on the mortgage. If Jane wants to accept her inheritance and hang on to it, she must continue making monthly car loan payments.

If Bob doesn't want to keep the home, he could sell it and use the proceeds to pay off the remaining mortgage balance (and keep any leftover money for himself). If Jane doesn't want to keep the car, she can also sell it, but she may be liable for the $1,000 difference. So she'll most likely just disclaim the car and avoid having to pay the remaining $1,000 car loan balance.

Stacks of credit cards and credit card bills.

As for the credit card debt, assuming there's no spouse, co-signer or account holder that's responsible for paying it, the outstanding credit card balance must be paid from the property in your estate. Your executor could use the $1,000 from your bank account, but that won't be enough. Assuming there's nothing else that can be used (or sold), your executor will need to have a talk with Bob concerning the $4,000 credit card debt that's left.

Specifically, they'll need to figure out how to use the house to cover the remaining $4,000 credit card balance. If Bob doesn't want to sell the house and use the proceeds from the sale to pay off your credit card debt, he could have the option of using his own cash funds instead.

In case you're wondering, Jane's inheritance won't be a factor here because the car has negative equity and the car loan debt creditor has a higher priority than the credit card company. In other words, if the car gets used to pay off any of your debts, it'll go to the car loan, not your credit card.

How are unpaid bills handled when you die?

If the deceased has an unpaid bill when they die, the only way it gets paid is if someone else is contractually or legally responsible for paying it or there's enough property in the deceased's estate to pay it.

Someone could be responsible for the unpaid bill if they're a joint account holder or a spouse in a community property estate. For example, a utility bill could be in both spouse's names. If one spouse dies, the surviving spouse is still obligated to pay the utility bill.

Or, the deceased's estate could be subject to state law that includes a necessaries statute. For instance, an unpaid emergency room bill could be the legal responsibility of a surviving spouse, even though they didn't agree to be jointly responsible for paying the medical bill.

If there's no one else legally responsible to pay an unpaid bill, the executor will use property from the deceased's estate to pay it. If there isn't money in a bank account they can use, then the executor may have to sell some of the property from the estate to pay the bill. And if there isn't money in the estate to pay the bill, it goes unpaid and no one else needs to pay it. But it also means there won't be anything to pass down to any potential heirs.

Do creditors get notice when someone dies owing them money?

Yes. When someone dies and their estate goes through the probate process, one task of the executor is to make sure the creditors are properly notified of the decedent's passing. This often entails publishing an estate notice to creditors in a locally and/or nationally circulated newspaper for a set period of time, such as a few weeks or a few months.

This notice provides creditors a chance (usually, a few months) to file a claim to get repaid from the estate that's currently being probated. Because mistakes and fraud happen, executors have the right to contest any creditor's claims, with the court deciding if the creditor should get paid back or not.

Can my creditors go after all my property when I die?

It's true that your creditors typically get paid before your heirs do. As a result, it may mean property in your estate can be repossessed by creditors or sold to pay creditors before your loved ones get a single cent or item. Property typically subject a creditor's reach after you die include:

  • Property used as collateral for a debt
  • Real estate
  • Antiques
  • Jewelry
  • Vehicles
  • Investments
  • Bank accounts
  • Cash
  • Most personal property of notable value

Luckily, certain assets are immune from creditors after your death. These include life insurance benefits, most retirement accounts and property in a living or irrevocable trust.

Is there anything you can do to protect your loved ones from your debt when you die?

Absolutely, and there are several potential options to consider. One of the most common, affordable and practical options is to get life insurance. Despite what many people might think, life insurance doesn't exist just to leave behind a tidy cash sum for your surviving spouse, child or loved one. Many people get life insurance policies to avoid burdening others with financial obligations when they die. This includes paying bills, covering funeral and burial costs and paying off any remaining debts.

But don't forget that life insurance proceeds are immune from a deceased's creditors. So they don't necessarily have to be used to pay back an unpaid bill or debt. However, letting a debt or bill go unpaid should only be considered if no one else who's alive is legally required to pay it and the debt isn't attached to collateral that a close family member or heir would like to keep.

To help illustrate, imagine that at the time of your death, your only outstanding debt was a mortgage on your home, which would go to your spouse when you died. It had a $50,000 remaining balance and you were the only person responsible for paying the mortgage. Also, imagine that you had a $100,000 life insurance policy with your spouse as the sole beneficiary.

After your death, your spouse would get the $100,000 from your life insurance company. If your spouse wanted to keep your home, they would need to continue making mortgage payments or pay off the $50,000 balance. The life insurance proceeds would give them the financial ability to consider either option.

If your spouse didn't want the home, they could also let the mortgage go unpaid and keep all of the life insurance proceeds for themselves. The bank/creditor would then foreclose on the house but couldn't touch the $100,000 life insurance proceeds to make up any remaining balance that may exist (also known as a deficiency balance).

In reality, your surviving spouse wouldn't let the house go into foreclosure. Instead, they would probably sell it and use the proceeds to pay off the mortgage. But this example demonstrates the protection life insurance proceeds have against creditors of unpaid debts.

Another option is to do some estate and financial planning. This might include paying off certain debts while you're still alive, preparing a will and/or setting up financial instruments to protect assets from creditors, like an irrevocable trust. Everyone's situation and circumstances are different, and there are various laws that could apply depending on the state you're in, so talking to an experienced estate planning professional is recommended.

Can creditors talk to my family about my debts when I die?

Probably, but there are limitations put in place by certain debt collection laws, such as the Fair Debt Collection Practices Act (FDCPA). For example, the FDCPA allows debt collectors to discuss outstanding debts with a deceased's:

  • Spouse
  • Parent (but only if the deceased was a minor child)
  • Guardian
  • Executor, administrator or other personal representative of the deceased's estate

This isn't an exhaustive list, because as a general rule, the FDCPA allows a debt collector to contact anyone with the authority to pay a deceased's debt using property from the deceased's estate.

Bottom line

Unless an exception applies, a person's financial obligations don't go away when they die. The debts and unpaid bills usually get paid using property from the deceased's estate, whether it's cash in a bank account or selling property and using the proceeds to pay the debt or bill. Things can get more complicated when heirs don't want to sell property needed to pay a debt or if a special situation applies and someone still alive is still responsible for the debt. If you die with unpaid bills or debts, your estate will typically become responsible for paying them. However, there are situations where a surviving family member could be personally liable for those debts or unpaid bills.

How do I create an estate plan?

There are numerous options and scenarios to consider when developing an estate plan that protects your legacy and achieves your objectives, and important decisions should be made with the advice of qualified lawyers and financial experts. Membership with Legacy Assurance Plan provides members with valuable resources and guidance to develop comprehensive estate plans that take life's contingencies into consideration and leave a positive impact for generations to come. Legacy Assurance Plan members also receive peace of mind that a team of trusted, experienced professionals will assist them in developing legal, financial and tax strategies that will meet their needs today and for years to come through periodic reviews.

This article is published by Legacy Assurance Plan and is intended for general informational purposes only. Some information may not apply to your situation. It does not, nor is it intended, to constitute legal advice. You should consult with an attorney regarding any specific questions about probate, living probate or other estate planning matters. Legacy Assurance Plan is an estate planning services company and is not a lawyer or law firm and is not engaged in the practice of law. For more information about this and other estate planning matters visit our website at legacyassuranceplan.com.

Phone - 844.445.3422
Email - info@legacyassuranceplan.com
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