What Happens to Your Debt When You Die?

What Happens to Your Debt When You Die? article image

Written by: Michele Procino-Wells, Esq. Procino-Wells & Woodland, LLC serves the Eastern Shore from their offices in Seaford & Lewes, DE & Berlin, MD

On a regular basis someone asks me, “If I die and have debt, who will be responsible for paying back those I owe?”

When a person dies, a new entity emerges, called our estate. Your “estate” represents your assets and your liabilities. Upon death, the “probate” process (the legal process of administering a deceased person’s estate), will resolve your debts and distribute your remaining assets to your heirs.

Creditors may legally claim assets within your estate (money or property) in order to satisfy debts owed to them. In Delaware, creditors must present a claim against your estate within eight months of the date of your death to secure their right to be repaid. A proper claim must include very specific information and must be either filed with the Register of Wills office or directly with the personal representative of the estate. The sending of just a regular bill generally will not suffice as a claim. If a claim is not properly presented within the eight month time period, the estate is not legally required to pay it.

A legal pecking order exists as to who is allowed first claim to retrieve money from your estate. In Delaware, the highest priority goes to administrative expenses, fees and commissions, then funeral expenses, child support, and medical expenses from the last illness. At the bottom of the barrel are unsecured creditors, like credit cards.

In the case of secured debts (e.g. home mortgage or auto loans), the collateral for those debts (the house or auto) is always subject to repayment of those debts. Thorough estate planning documents should address what happens to this type of debt upon your death. If you die with a mortgage on your home and you leave your house to a particular person, do you want that person to become responsible for the mortgage or do you want other estate assets used to first pay off the mortgage? If other estate assets are used, it may inadvertently reduce someone else’s share of the estate.

Except for certain situations, creditors are unlikely to go after surviving family members when a debt cannot be paid by your estate assets. If the debt is joint, however, such as between a married couple, the surviving joint debtor will still be responsible for the debt. Or, if someone co-signed on the decedent’s debt, that co-signer will still be liable.

Many estates now include significant amounts of credit card debt. To determine whether anyone other than the decedent is responsible for that debt, you must determine if the debt was joint. If the other person is only an authorized user, that person is not on the hook for the debt. This applies even in the case of married couples. However, if the authorized user continues to use the card after the decedent’s death, they will be responsible for those charges.

Only estate assets are subject to the decedent’s debts. Thus, if assets pass by right of survivorship, such as a joint bank account to a surviving owner and that owner is not otherwise responsible for the debt, that asset is not included in the estate and thus, is not subject to the estate debts. Similarly if an asset passes by beneficiary designation, such as life insurance, those assets are not part of the estate and thus are not subject to estate debts.

Generally, your debt belongs to you and you alone; it is not passed on to your family members when you die and only certain assets are subject to your debts after your death. Every situation is different though and many exceptions to that general rule apply, so it is always important to seek the advice of an experienced professional with knowledge of state probate law and to create a thorough estate plan that takes your debt into consideration.