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Understanding what happens to debts after you die

On Behalf of | Jul 20, 2023 | estate planning | 0 comments

What happens to debts after one’s passing is often a source of concern for California residents who are planning their estate. Individuals should understand that debts do not simply disappear when a person dies, as they generally need to be addressed as part of the estate administration process.

Estate administration

After someone passes away, their assets and liabilities become part of their estate. The estate administration process involves gathering and valuing all the assets, paying off debts and distributing the remaining assets to beneficiaries according to the decedent’s will or to state intestacy law if no will exists.

Priority of debt repayment

Typically, funeral expenses, administrative costs and legal fees related to the estate administration process take top priority. After addressing these expenses, secured debts, such as mortgages and car loans, are typically next in line for payment. Unsecured debts, like credit card debts and personal loans, follow suit, often depending on local laws.

Debt responsibility

It’s essential to note that debts are generally the responsibility of the deceased person’s estate, not their surviving family members. In most cases, surviving family members are not personally liable for the deceased person’s debts unless they were co-signers or joint account holders on specific loans or credit lines.

Debt discharge

If the deceased person’s estate lacks sufficient assets to cover all debts, the debts are usually discharged, meaning they remain unpaid. Creditors may have to write off these debts as losses. This discharge does not affect surviving family members’ credit history or financial responsibility.

Impact on inheritance

If there are insufficient assets in the estate to cover all debts and expenses, it can affect the inheritance left for beneficiaries. In such cases, beneficiaries may receive less than anticipated or nothing at all.

Community property states

It’s important to note that community property states in the U.S., such as California, have specific rules regarding debt responsibility for spouses. In these states, certain debts incurred during the marriage may be the joint responsibility of both spouses, even after one spouse passes away.

Preparing for the future

Proper estate planning can help individuals prepare for what happens to their debts after they pass away. Being proactive about the future ensures a smoother process for loved ones during a challenging time.