What Happens to Debt When You Die?

When a loved one passes away, many people worry about the financial implications, particularly regarding debt. A 2016 study by Experian found that 73% of Americans will die in debt, raising concerns about whether relatives will inherit these financial burdens. Let’s clarify what happens to debt after death and what responsibilities, if any, family members may have.

The Truth About Inherited Debt

In most cases, relatives are not responsible for the debts of a deceased family member unless they meet specific criteria. Here’s what you need to know:

1. Estate Responsibility: The deceased's estate is primarily responsible for settling any outstanding debts. This includes selling assets—like homes, cars, or personal belongings—to pay creditors before any inheritance is distributed.

2. Protected Assets: Certain assets are exempt from creditor claims. For example, retirement accounts and life insurance policies typically pass directly to beneficiaries without being affected by the deceased's debts.

3. Insolvent Estates: If the estate has more debt than assets, creditors may have to write off the remaining balances. In this scenario, family members do not inherit any debt.

Situations Where Family Members Might Be Liable

While most family members are not liable for a deceased person's debts, there are exceptions:

• Joint Account Holders: If you co-signed a loan or are a joint account holder, you may be responsible for the debt.

• Community Property States: In states like California and Texas, spouses may be liable for debts incurred during the marriage.

• Inherited Assets with Loans: If you inherit property that has an outstanding loan (like a house or car), you may also inherit the debt attached to that asset.

The Probate Process

The probate process is essential in managing a deceased person's estate and settling debts. Here’s how it typically works:

1. Appointing an Executor: The executor manages the estate, paying debts and distributing remaining assets according to the will, from all monies left in the deceased person’s name.

2. Inventorying Assets: The executor takes stock of all assets and liabilities.

3. Settling Creditor Claims: In New York, Creditors have 7 months to file claims against the estate after notice is given.

4. Distributing Remaining Assets: Once debts and taxes are settled, any remaining assets can be distributed to beneficiaries.

Dealing with Debt Collectors

Debt collectors may attempt to contact family members after a death. However, under the Fair Debt Collection Practices Act (FDCPA), they can only discuss the debt with certain individuals:

• Spouses

• Parents (if the deceased was a minor)

• Guardians

• Executors of the estate

If you receive calls from debt collectors regarding your loved one’s debts, remember that you are not obligated to pay unless you fall into one of these categories.  But remember, you are not personally liable for the debts – the money comes from whatever is in the deceased peson’s estate.

Protecting Your Rights

If you're contacted by debt collectors or feel overwhelmed by the responsibilities following a loved one's death, consider these steps:

1. Know Your Rights: Familiarize yourself with your rights under the FDCPA.

2. Document Everything: Keep records of all communications with creditors.

3. Seek Legal Advice: Consult an attorney if you're unsure about your obligations or if you're being harassed by collectors.

While dealing with a loved one’s debts can be complex and stressful, understanding your rights and responsibilities can help alleviate some of that burden. If you find yourself navigating this challenging situation, consider reaching out for professional assistance to ensure that you protect your interests while honoring your loved one’s legacy.

At Sammartino & Sultan Law Group, we’re here to help you understand your options and guide you through the estate planning process. Contact us today for personalized legal support tailored to your needs.

About the Author

Leslie has been practicing law since 2009 and is the host of the estate planning podcast 'Legacy Purse'. She has a long history of representing family members struggling to inherit property and/or wealth from deceased family members through the Probate Courts. Knowing how time-consuming and expensive the probate process is, Leslie takes great pride in helping her clients learn how to plan and protect their families during their lives so they can avoid the probate court process and save their loved ones that additional grief (and expense).