How does debt affect survivors after your death?

| Aug 22, 2020 | Firm News

Most people have some debt, and when they die, that debt does not automatically go away. You may wonder if you will leave your loved ones with a pile of bills to pay after your death. 

According to CNBC, what happens with your debt depends on the type of debt, your estate and state laws. 

Pays from estate

The most common way to handle debt after a death is for the court to order the executor to pay it out of your estate. This will reduce your estate assets, and it could mean the executor must sell off assets to get the money to repay debts if you do not have enough cash. 

Your family may end up with nothing if you owe too large of an amount because the executor must pay your creditors first before dispersing your assets. If he or she pays heirs prior to creditors, then the executor could face personal liability to repay the debts. 

You should note, though, the court will not take assets with a beneficiary, such as life insurance or retirement accounts, to repay debt. Those assets go directly to the beneficiary. The only exception is the IRS has the ability to take those assets for taxes due, but this rarely happens. 

Inheriting debt

In most cases, your debt dies with you. If your estate cannot repay in full, the debt will not pass onto your heirs. The exception in Texas is that debts benefiting your family do become your spouse’s responsibility because of community property laws. 

In addition, if it is joint debt, the other party retains full responsibility for repayment.