It is not uncommon for people to fear that their family might have to pay back their debts after they die. Understanding what happens to your property, including your debts, is vital for anyone who wants to craft an estate plan. Further, common fears, such as leaving your debts to your family to repay, can often be alleviated simply by gaining a better understanding of the probate and estate settlement process. Today, as part of our ongoing series on basic questions about estate planning, we are going to look at what happens to your debts after you die, and why your family will most likely not have to repay them.
What Happens to debt in probate?
As with any other issue left behind by a deceased person, the question of who repays that person’s debt gets answered through the probate process. In probate, someone will take control over the decedent’s property, including any assets or debts that person may have left behind. Because the debts become part of the estate, it falls to the estate administrator, sometimes called an executor, to repay the money owed. It does not become the responsibility of family members of the decedent to repay any remaining debt.
Once the estate administrator takes over the estate, he or she will have to allow creditors to file claims if they believe the decedent owed them money. The administrator will have to evaluate each claim and use estate assets to repay the valid claims. Once the debts get repaid, the administrator can then begin distributing the remaining assets as inheritance.
Note, that if there are more debts than assets in an estate, some of the creditors will not be repaid
The big exception to the general rule that family members do not have to repay the leftover debt left behind by a deceased relative comes when one or more family members hold joint debt. A joint debt is one owed by one or more co-borrowers. For example, if you and your spouse open a joint credit card, you are considered joint account holders, or joint debtors. Regardless of who uses the card, any debt incurred will be the responsibility of both joints account holders to repay.
So, in the event that one joint debtor dies, the remaining joint account holder will still be responsible for repaying the debt. This issue is not only of importance to spouses who typically enter into joint debt situations, but also important to parents of college students who obtained private student loans. If the parents cosigned the loans, they will still be responsible for repaying them even if their child dies and the parents themselves never used money to attend college.