ôô

What Happens to Debt When You Die?

Understand the financial side of death and 7 tips to protect your heirs.

By
Laura Adams, MBA,
Episode #196

I know it’s a depressing topic, but at some point you’ve probably wondered who picks up the tab for a dead person’s debt. Are you responsible for a parent’s debt after they’re gone, for instance? And will anyone inherit your debt after you depart this world? We’ll answer those questions and cover what you need to know about the financial side of death in this article.

The podcast edition of this article was sponsored by Go to Meeting.  With this meeting service, you can hold your meetings over the Internet and give presentations, product demos, and training sessions right from your PC. Visit gotomeeting.com, click the “try it free” button, and use promo code: Podcast.
 

Buy Now

What Happens to Debt When You Die?

The moment you die, something is automatically created. No, I’m not talking about a phoenix rising from the ashes or anything spiritual here. Your physical death gives birth to your legal estate, which is simply what you own when you die—no matter how big and fancy or how small and simple it is. The value of your estate is calculated by adding up all your assets, like cash accounts, investments, vehicles, and real estate, and then subtracting out the total of everything you owe.

Who Handles Your Estate When You Die?

After you die, someone has to handle the logistics of your estate. That person is called an executor and hopefully you’ve already named a trustworthy one in your will. A judge will appoint an executor for you if you die without a will. Probate is the legal process that an executor goes through to verify your will and to distribute your property. It can take a long time and involve lots of attorney and court fees, depending on the size and complexity of your estate.

The executor may be given permission by the court to sell your possessions, to pay your debts and taxes, and to distribute what remains to those named in your will. If you don’t have a will, your remaining property goes to your relatives according to a formula determined by the state in which you live. That means everything you own could go to family members that you haven’t spoken to in years. If you can keep some or all of your property out of the probate process, your heirs will thank you because your estate will be larger and they’ll receive an inheritance faster. I’ll give you tips about how to legally avoid probate at the end of this article.

Who Pays Your Debt When You Die?

So let’s get back to who pays your debts when you die. The money in your estate is used to settle debts that are in your name only. If there’s not enough money or assets to sell to cover them, then your creditors are generally out of luck. There’s nothing they can do if your estate is insolvent or broke. Debt in your name only doesn’t get passed to your spouse, partner, children, or siblings—it becomes the responsibility of your estate. However, if you live in a community property state and are married, your spouse may still be liable for debt accumulated during your marriage, even if it’s in your name only.

Pages

The Quick and Dirty Tips Privacy Notice has been updated to explain how we use cookies, which you accept by continuing to use this website. To withdraw your consent, see Your Choices.