Figure out how debt will impact surviving loved ones

In many cases, surviving loved ones are not obligated to pay debts after a death. Still, there are some cases where lingering debts create problems for those who are left behind.

To find out how debt will impact surviving loved ones, find some general rules below. Ultimately, you should consult with an estate attorney to confirm the rules for your situation or the situation of the person you’re planning for. You can find an attorney here.

If, upon passing, your estate or the estate of the person you’re planning for has more money than debts, the estate is responsible for paying all debts. Beneficiaries inherit whatever is left after all debts are paid.

Here’s an example:

  • Accounts:

    • $100,000 in bank accounts and house value

    • $50,000 in credit cards and medical debt

  • What needs to be done:

    • Pay the $50,000 in credit cards and medical debt from the estate accounts

    • Distribute the remaining $50,000 to the beneficiaries

If your estate or the estate of the person you’re planning for has less money than debts, the estate is responsible for paying debts in the order of priority determined by the state.

  • If heirs wind up in this situation, they should consult a lawyer, because failure to pay the estate expenses in the right order could lead to the executor being liable.

  • The priority for debts in most states is:

  1. Medical bills (especially Medicaid)

  2. Funeral expenses

  3. Federal and State Taxes

  4. Other creditors (credit cards, cable companies, etc.)

Heirs are usually NOT OBLIGATED TO PAY debts beyond what is covered by the estate, unless:

  • The heir cosigned on the debt

  • The heir is the spouse of the deceased and lives in Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin. Contact an attorney if this is the situation, because there may be obligations for debts.

  • The heir claimed the deceased as a dependent

Creditors may still try to collect the debt, even if heirs aren’t obligated to pay.

Example:

  • Accounts:

    • $50,000 in estate bank accounts

    • $40,000 in medical debt

    • $10,000 in funeral debts

    • $5,000 in credit card debt

  • What needs to be done:

    • Pay the $40,000 of medical debt and $10,000 of funeral debt from estate bank accounts

    • There is now $0 left in the estate

    • In most cases, the credit card bills can be ignored as heirs do not have to pay.

    • However, in the states listed above (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin), heirs may have to pay the credit card bills from their own money.

planning, settling affairsJennifer Goodprobate, legal, finance, planning, financial and propertyComment