Who pays off someone’s debt when they die? Perhaps you have relatives you are worried will leave behind a large amount of unpaid debt, and you fear you may be left to foot the bill. Maybe you’ve thought about your own debt and wondered if your family will be stuck paying it when you pass away.
Fortunately, that is normally not the case. There are some exceptions, however, and there are also some things you can do to make sure you don’t leave this situation behind with your own unpaid debts.
The Estate Pays, Not the Survivors
When a person dies with unpaid debt, that debt does not directly pass to the surviving family. In other words, they don’t inherit the bills. However, that debt doesn’t just vanish.
Unpaid debt becomes the responsibility of the deceased person’s estate. The trustee responsible for overseeing the estate first will use any assets in the estate to pay creditors—the parties to whom the debt is owed—before dividing up the assets among the heirs according to the deceased’s will, if there is one. This process is called probate.
The estate’s assets may include cash or other property that could be sold. Heirs receive whatever is left over from the estate after all creditors have been satisfied. Even if there aren’t enough assets in the estate to cover all the debt, it still will not normally pass to heirs.
So, while a debt liability isn’t directly transferred to heirs, payment of it may reduce any inheritance destined to be paid out.
Exceptions to Probate Debt Payment
There are some exceptions to this general rule, however. For example, if you have co-signed a debt with someone and a balance remains when that person passes away, you will be responsible for that debt. The main idea behind co-signing a loan is to give further assurance to the lender that the debt will be paid. By co-signing, you agree to pay the debt if the primary borrower is unable.
If you live in a community property state, you may be required to use any jointly owned property to resolve the unpaid debts of a deceased spouse. Common examples of jointly-owned property include checking accounts (from which the cash could be used to pay debts) or real property, such as houses or land. The community property states are: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Residents of Alaska, Kentucky, South Dakota, and Tennessee can opt in to this status.
Joint owners on debt accounts such as credit cards are responsible for debt balances left by the other person on those accounts. But an authorized user is not usually responsible for the amount owed.
There are also some instances in which state law specifically holds living relatives who aren’t a spouse responsible for certain debts. An example of this, although it is rarely enforced, is filial responsibility, which means that adult children can be legally responsible for a deceased parent’s medical debt.
Secured Debts May Be Different
Secured debts allow a creditor to claim specific property to cover the asset if living relatives don’t choose to pay it off or refinance. Examples include:
- Mortgage: Lenders can reclaim the home as collateral if heirs don’t move to sell or continue ownership.
- Car: If there is an outstanding debt on the deceased person's car, then the creditor can reclaim the vehicle.
What Creditors Can’t Take
There are some specific assets that creditors cannot claim because they pass directly to the beneficiaries without ever becoming part of the deceased person's estate, bypassing the probate process altogether. That being the case, heirs can’t be forced to use these assets to cover a deceased person's unpaid debt.
The key to determine which assets fit this description is whether they have a named beneficiary. Common examples include:
- Life Insurance
- Retirement Accounts (IRA, 401(k), etc.)
- Payable on Death Accounts
There are some pitfalls to avoid with the named beneficiaries on these accounts if the goal is to avoid making the assets available to creditors for paying a deceased person's debt.
- If the named beneficiary passes away before the primary account owner, then the asset becomes the property of the deceased person’s estate. This is one of the many reasons to regularly review your beneficiary designations and update them accordingly.
- Sometimes, the estate itself is the named beneficiary. You may have a good reason for naming the estate as the beneficiary, just understand that the asset in question becomes part of the estate upon your death, and becomes available for paying estate debts.
What If Someone Dies Without a Will?
When someone dies without a valid will, they are said to have died “intestate.” State law will dictate how the estate is distributed through the probate process in that case.
Probate is already time-consuming and expensive, but when there is no will to direct that process, the ability to decide who gets which assets is lost, so it’s not a desirable outcome.
The Bottom Line
A deceased person's debt will not usually pass to heirs. Instead, any unpaid debts become part of an estate when someone passes away, even if they die without a will. While the debt doesn’t become the direct responsibility of heirs, it will reduce the value of what is ultimately distributed from the estate because estate assets will be used to cover the debt payoff.
There are certain exceptions to this, such as when the account is jointly owned, co-signed, assets are owned in a community property state, or when specific laws require living relatives to cover the debt, as with filial laws that transfer elderly parents’ medical expenses to their children.
Frequently Asked Questions (FAQs)
Which states have filial responsibility laws?
There are currently filial responsibility laws in more than half of U.S. states and territories. If your parents live in one of the following states, consult an attorney to understand how these laws could affect you:
- New Jersey
- North Carolina
- North Dakota
- Rhode Island
- South Dakota
- West Virginia
- Puerto Rico (U.S. territory)
How do I protect my inheritance from creditors?
There are a few ways to shield your inheritance from creditors, but the most reliable way is to ensure your loved ones (for whom you'll be the beneficiary) set up an irrevocable trust. This type of trust generally protects assets from creditors and would provide the best protection for your inheritance.