When you die, your debts do not expire with you. Most debt still needs to be paid off, if possible. However, who is responsible for paying the debt depends on the type of debt, and some assets are protected from being used to satisfy a debt.
Outstanding debt may include mortgages, credit card bills, car loans, personal loans, or condominium fees — even car leases, where death is considered “early termination” of a contract.
Usually your estate is responsible for paying any debts you leave behind. If the estate does not have enough money, the debts will go unpaid. In general, debt collectors may not try to collect payment from your relatives and heirs. However, there are some exceptions. Co-signers and guarantors of a particular debt are responsible for that debt, and someone who held property jointly with you would be responsible for any debts on the joint property. In addition, spouses in “community property” states — states where property acquired during marriage is owned jointly by both spouses — may be responsible for some debt.
Creditors are paid from the part of your estate that passes through probate, which means any property that passes through a will. The person who is appointed personal representative or executor of your estate is responsible for making sure the creditors are paid. The personal representative uses estate assets to pay off the debts before any money passes to heirs. If you have significant debts, it is possible that your entire estate will be used to pay creditors.
Creditors cannot be paid from any assets that pass directly to a beneficiary. For example, a jointly held bank account would pass directly to the joint owner, and the funds in that account could not be used to pay creditors. Similarly, life insurance policies pass directly to the beneficiaries, so creditors do not have access to those funds.
Whether or not a creditor can access funds in a trust depends on state law as well as what kind of trust it is. Consult with your attorney to determine if your assets are protected.
This post contributed by Geoff Hoatson, Attorney/Principal, Family First Firm.