The loss of a loved one is always difficult. In addition to grieving, surviving family members and friends are often tasked with the logistics of planning a funeral, cleaning out a home, and settling an estate, among other responsibilities. The loss becomes even more distressing when the decedent passes away owing money.
In most cases, debt is not inherited and loved ones are not personally liable for the debts owed by an individual at the time of death. Debt is often settled by the estate or, in some cases, forgiven.
However, there are some exceptions, as mentioned below. This article discusses types of debt, how debt is handled when someone dies, and the role of the executor or administrator of an estate.
Dying With Debt
Let’s jump to the punchline to ease everyone’s anxiety: In most cases, debt is not inherited and loved ones are not personally liable for the debts owed by an individual at the time of his or her death. Rather, debt is often settled by the estate or, in some cases, forgiven.
Types of Debt
Debts are financial obligations owed by the deceased at the time of their passing. It is important to keep in mind that jointly held debts, such as co-signed loans, or monies owed on joint financial accounts (for example, jointly-owned credit cards) pass directly to the surviving party and do not become debts of the estate.
Secured debt
Money owed to a lender that is backed by collateral, such as a house or car. Mortgages and auto loans are common examples.
Unsecured debt
Money owed to a lender that is not backed by collateral. Medical bills, credit card balances, and some personal loans are examples.
Note: An estate might be responsible for other expenses, such as utility bills, homeowners’ association fees, and taxes, in addition to the categories of debt listed above.
How Debt Is Handled by a Decedent’s Estate
During the probate process, the executor of the estate typically pays off debts using estate assets first and then distributes any remaining funds or assets according to the deceased person’s will. If the estate has enough money to cover all debts, it is considered solvent. If it does not have enough, it is considered insolvent.
When the estate lacks sufficient assets to cover all debts, executors and administrators may need to determine which debts to pay according to priority rules that are set at the state level.
Virginia priority rules
Virginia law assigns a clear order of priority to creditor claims. This hierarchy helps ensure that essential costs—such as estate administration, funeral and medical expenses, family and spousal allowances, and federal taxes—are paid first before paying off creditors.
In most cases, when the estate runs out of money, the remaining debts are forgiven and surviving family members do not have to pay creditor claims.
Exceptions
Not all debts are subject to probate or estate administration. Secured debts—those tied to a specific asset—might be inherited by a beneficiary who receives that asset.
- If someone inherits a house or a car, they may become responsible for attached debts (such as a mortgage or auto loan).
- In some cases, the lender may repossess the asset, or the beneficiary may have to refinance in order to assume the debt.
In addition, not all assets are available to pay creditor claims. Certain assets are distributed automatically to beneficiaries and generally do not go through probate (for example, life insurance proceeds and retirement accounts). As a result, these funds generally may not be used to satisfy creditor claims.
Managing Debts of an Estate
The executor or personal representative of an estate has a significant and sometimes challenging role in managing the payment of estate debt. He or she must make certain that a decedent’s outstanding debts are validated and settled appropriately.
Key responsibilities
- Compile an accurate list of debts
- Review and verify each claim for validity and timely enforcement before making any payment
- Pay higher-priority claims before lower-priority claims to avoid personal liability
How to Avoid Stress and Worry
A well-planned and professionally advised estate plan can alleviate concerns about leaving your loved ones with the stress of managing creditor claims.
If you have a loved one who has passed owing debt—or if you are charged with administering an estate—you may wish to seek guidance from an attorney who handles estate administration in your state.
The Dean Law Firm can help in both circumstances. Contact us to set up a consultation to see how we may assist.
