An Estate is everything someone owns at the time of death. The process of paying bills and distributing what’s left is called Probate. The executor (or personal representative) of an Estate uses the deceased person’s assets to pay off the Estate’s debts.
Debts Paid During the Probate Process
The executor might write checks from the deceased person’s bank account or sell property in order to get the money. If the deceased person’s debts outweigh her assets, then there might be nothing left over to distribute to heirs. However, if there isn’t enough money in the Estate to cover debts, then creditors are generally out of luck.
For example, the outstanding balance on a credit card is usually an unsecured debt. This means that if the Estate can’t pay the balance, the credit card company has no recourse and must eat the loss. One the other hand, a car loan is secured by the vehicle. If payment isn’t received, the lender can repossess the car. Whoever inherits the vehicle can continue making payments o the car loan.
Debts That Might be the Responsibility of Another Person
There are some special instances in which someone else could be responsible for the decedent’s debt. Those scenarios include:
- Co-signers on a loan.
- Joint owners or account holders (authorized signers on an account are not responsible for the debt).
A mortgage or home equity loan is one instance in which a decedent’s debt can be inherited. A person that receives a home directly from the Estate generally takes that home subject to all mortgages, liens, or other judgments against the real property. This beneficiary might sell home to repay the debt or he might assume ownership of the mortgage and continue to make payments. But Beware! Lenders can request proof that the new owner is able to repay the debt and can even demand immediate repayment. Typically, federal guidelines exempt family members from these rules, but the laws are complex. Speak with a lawyer regarding mortgage obligations before accepting the gift of a home from an Estate.
If the executor of the Estate sells the home, then mortgages, liens, and other judgments against the property are paid off as part of the closing costs.
Creditors typically can’t go after certain assets like retirement accounts or life insurance benefits to pay off debts. These assets go to the named beneficiaries, and they are not considered part of the probate process settling the estate.
This is just an introduction to a complicated process. Family members and executors should keep in close touch with legal and financial professionals to make sure they pay what is owed in a timely manner, but nothing more.