What Happens to Debts of the Deceased?
Carissa Giebel 6:21 p.m. CST January 27, 2015
Will you be responsible for the debts of your love one? This depends on the situation and your relationship.
If a deceased leaves behind a will or a living trust, those documents name a personal representative or trustee, who may notify creditors of the death and pay any known creditors out of the assets left by the deceased, if any.
With a will, this notice must be given to creditors. A trust does not require creditor's notice, although notice does shorten the time period in which a creditor can make a claim.
When a will is left by the decedent, the personal representative will likely submit it to the probate court, which supervises the process of paying debts and distributing the remaining assets to beneficiaries. This court process can often become time-consuming and costly, which is why some people do planning to avoid probate.
That is one of the many benefits of a living trust, which would name a trustee to ensure all known debts are paid out of the remaining trust assets.
If the deceased did not leave an estate plan naming a personal representative or a trustee, the probate court will assign an administrator of the estate, who will have the responsibility of notifying creditors of the death and paying any known creditors out of the estate assets, if any.
All known creditors are paid, if possible. After the notice is posted in the local newspaper, unknown creditors only have a few months to present a claim. After this window of time passes, the opportunity to present a claim expires and the personal representative or trustee is not required to pay the debts.
Any debt carried by two or more people, including debt of a married couple, would usually become the full responsibility of the survivor(s). Any debt where there was a co-signer, the co-signer could be responsible for repaying the full debt.
If there are no assets left in the estate or living trust, then most debt that is not joint debt or does not have a co-signer will die with the decedent. Rarely would survivors be required to pay an outstanding debt of the decedent, unless there is a surviving spouse.
Whether the surviving spouse is liable depends on a number of factors. Sometimes there are enough assets to cover some of the debt, but not all of it. Some creditors may get paid and others may not. Some may also receive a reduced sum and forgive the remainder of the debt.
Student loans can be different that most other debt. Federal student loans are discharged when the primary borrower dies, even if there is a co-signer. Private student loans, on the other hand, may not be forgiven when the primary borrower dies.
Debts are usually paid first out of liquid assets, such as cash from a bank account. Sometimes assets must be liquidated to pay off debt, such as the sale of real estate. Some assets generally cannot be taken by creditors, such as 401(k) plans and life insurance policies naming a person as a beneficiary, rather than the deceased's estate.
So does debt die with a person? It depends.