If you leave any debts behind when you die, it can eat up your assets that you had anticipated to leave to heirs. A lot of the time, some family members could be on the hook for your debt. Most of the people take out life insurance to not only make sure there is something left after they passed on for their loved ones but to also help deal with any financial expenses or debt.
The debt you had will become the estate you have left behind’s responsibility. Everything you owned at the time of your death is called an estate. A probate is the process of paying your expenses and distributing what is left. The person that deals with your will and estate after your death, will assets to pay off your debts is called the executor. Creditors are generally out of luck if there isn’t enough to cover your debts.
Here are some circumstances where others are responsible.
Spouses and others generally are responsible for paying debt if they:
- Co-signed for a loan.
- Are joint account holders
- Are spouses in community property states, although half of any community property from marriage could be put toward debt obligations.
So what really happens once you have passed on?
Firstly an executor (as nominated in your Last Will and Testament) will be appointed. Their job is to collect all the estate items such as property, money, etc. And distribute then towards debts and liabilities after which the remainder is shared to the beneficiaries stated in your Last Will and Testament. If there isn’t enough liquidity to settle all your outstanding debts the executor will be forced to sell any assets in the ‘estate’ to settle the outstanding debt, this could potentially leave your loved ones without anything.
The Debt that remains will need to be verified as secured and/or unsecured debt. Secured debts pertain to debts that are secured against particular assets ‘this is known as signing security for the debt’. With secured debt if the repayments stop, the bank can take the certain security ‘such as property’ and sell it to settle the debt owing. Unsecured debts pertain to debts that are not secured ‘such as credit cards and personal loans’. There is no particular asset the bank can take and sell and/or use to settle the outstanding debt. The bank will need to go to court to get an order that your valuables can be sold to settle the debt.
If your debt is shared with another, ‘such as a spouse and/or business partner’ the responsibility to settle the debt will become that of the joint-account holder.
If you have a guarantee on a loan, it becomes the responsibility of the person who signed as a security on the loan to pay back the outstanding money.